When you're investing in a stock that's achieved significant gains in recent years, a potential worry is that it may have reached a peak, or that it's approaching one. But when a business is doing well, then a strong case can still be made for why the stock can continue to rise higher. Artificial intelligence (AI) is proving to be a huge catalyst for many tech stocks these days.
Broadcom (AVGO +2.03%) is an excellent example of that. The company makes custom chips for tech companies, and as they have expanded their AI capabilities and built new AI-powered products and services, Broadcom's business has been thriving. The stock is now up around 800% in just the past five years. Has it gotten too expensive, or can it still rise higher?
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Analysts think it may be approaching a peak
Broadcom's stock closed at $406.54 last week. And according to the consensus analyst price target of $435.30, it may still rise further, but at that level, the upside would be less than 10%. There may not be much more room for the stock to rise in the short term if you believe analysts are right about the stock. However, their projections focus on where they expect a stock to go in the next year or so; in the long run, the upside may be far greater.
Analysts have also been raising their price targets for the tech company, given how impressive its performance has been in recent years. With a strong growth rate often in excess of 20%, Broadcom has been doing exceptionally well due to AI, and that trend can continue for the foreseeable future.
AVGO Revenue (Quarterly YoY Growth) data by YCharts
Broadcom's business is strong, but the stock's valuation is incredibly high
While Broadcom has been generating strong growth in recent quarters, there's no denying that investors are paying a massive premium for the stock these days. At nearly 80 times earnings, it's far more expensive than the multiple of 25 that the S&P 500 averages. A premium may be justifiable for the company in light of its impressive results; it's just a question of how much is too much for the stock.
Broadcom continues to see much more demand in the future, however, and the stock can make for a compelling AI investment to hang on to for the long term. It can be worth buying and holding because if the business continues to grow its top and bottom lines, its valuation will look more attractive in the future, making the stock a better buy in the process.
NASDAQ: AVGO
Key Data Points
The risk is that if there's a pullback in AI spending, the stock could be due for a correction. But if you're comfortable with that uncertainty, Broadcom may be a solid AI stock to buy right now.
