The widespread adoption of ChatGPT in early 2023 heralded the wave of generative artificial intelligence (AI) to come. These next-generation AI models were significantly more useful than their predecessors but required a great deal more computational horsepower. Data centers and cloud providers -- where most AI resides -- scrambled to obtain the best AI chips money could buy.
This fueled a growth spurt for Nvidia. Its graphics processing units (GPUs), originally designed to generate lifelike images in video games, proved equally adept at moving data through the ether at lightning speeds.
Image source: Nvidia.
However, priorities have begun to shift, opening the door for alternative solutions. While Nvidia will likely continue to dominate the data center GPU space, the current focus on energy-efficient alternatives suggests that Broadcom (AVGO 1.63%) represents a second chance for AI investors.
GPUs, while powerful, consume a great deal of energy. Large-scale AI users are increasingly focusing on more economical ways to power AI. That's where Broadcom comes in. The company's application-specific integrated circuits (ASICs) can be customized to be much more efficient for specific computing tasks, resulting in energy savings and lower costs.
In the fourth quarter, Broadcom delivered record revenue of $18 billion, up 28% year over year, fueling adjusted earnings per share (EPS) of $1.95, an increase of 37%. The results were driven by strong demand for its AI semiconductors, as revenue grew 74% year over year to $6.5 billion. That accelerating AI revenue growth is expected to continue, as the company is guiding for AI-centric sales to soar 104% to $8.2 billion.
Even as some providers are seeing slowing AI growth, Broadcom's growth and its backlog are accelerating. During the Q4 earnings call, CEO Hock Tan said, "We have never seen bookings of the nature like what we have seen over the past three months." The company's consolidated backlog grew 47% to a record $162 billion, up from $110 billion in Q3. Broadcom expects to earn this as revenue over the next 18 months, suggesting revenue growth will vault higher. Moreover, Tan left no doubt as to the company's biggest growth driver, saying, "We expect AI revenue to continue to accelerate and drive most of our growth."
NASDAQ: AVGO
Key Data Points
Investors shouldn't sleep on growth of that magnitude, and Wall Street certainly isn't. Analysts' average price target for Broadcom over the coming year is roughly $456, representing potential upside of 42% for investors. Furthermore, of the 50 analysts who offered an opinion in January, a whopping 96% rate the stock a buy or strong buy, and none recommend selling.
Finally, investors might expect to pay up for such high-quality growth, but that's simply not the case. Broadcom is selling for 31 times forward sales and boasts a price/earnings-to-growth (PEG) ratio of 0.23, when any number less than 1 is the standard for an undervalued stock.
Given the company's accelerating growth, large and growing backlog, and glowing recommendation from Wall Street, I would suggest that Broadcom is the stock to buy if you fear you missed the AI boom.
