Broadcom (AVGO +0.57%) has been on fire over the past two years. Given the company's 70.86% annualized return over this period (as of writing), a $5,000 investment in mid-2024 would be worth about $14,597 today. That's impressive. But can Broadcom keep the party going? Let's find out how much a $5,000 investment in the company might be worth in about two years.
What's driving Broadcom's performance?
Broadcom designs application-specific integrated circuits (ASICs), or custom chips tailor-made to handle specific workloads. It is also an infrastructure software specialist, a business that generates high-margin recurring revenue through subscription-based licenses. Naturally, the company's semiconductor business has been the main growth driver in recent quarters. Broadcom's AI chip business is booming as the company partners with hyperscalers to design their AI chips. The list includes Alphabet (GOOG -3.97%) (GOOGL -3.93%) and Meta Platforms (META -0.69%).
Image source: The Motley Fool.
Broadcom is posting excellent financial results thanks to its work in this area. In the second quarter of its fiscal year 2026, ended on May 3, the company's revenue increased by 48% year over year to $22.2 billion. AI semiconductor revenue was $10.8 billion, a whopping 143% higher than the year-ago period. Broadcom's adjusted earnings per share (EPS) were $2.44, 54% higher than the prior-year quarter, and free cash flow totaled $10.3 billion, up 60% year over year. Broadcom projected that its AI chip business will grow even faster -- by more than 200% -- in its upcoming third quarter.
The bull case for Broadcom
Broadcom is currently trading at 20.8x forward earnings, versus an average of 20x for information technology stocks. That seems like a bargain for a company growing its earnings as quickly as it is, especially since it could maintain that pace over the next few years. Custom AI chips are increasingly popular because they are well-suited to handle certain workloads, can outperform comparable GPUs (Graphics Processing Units) in price-performance, and help corporations reduce costs when deployed at scale.
That's why Broadcom has signed several long-term deals, including one with Meta Platforms that will last until 2029 and another with Alphabet through 2031. So, the company could see sustained demand for its products through 2028 (and perhaps beyond). Analysts estimate that Broadcom's EPS will grow by about 67.6% in its next fiscal year (which should end in early November 2027).
Let's take that at face value and assume EPS growth remains at similar levels, around 60%, during its fiscal year ending in November 2028 (for simplicity, let's ignore this year's EPS growth, since the market already somewhat reflects it). Given these inputs, and assuming Broadcom's forward price-to-earnings (P/E) is around 20 by the end of our period, a $5,000 investment will be worth about $12,892.
NASDAQ: AVGO
Key Data Points
Mind your assumptions
Any change in the inputs would significantly alter the result. So, it's important to consider what might go wrong before rushing to buy Broadcom's shares based on the math above. One problem with the company is its significant customer concentration. Even with the long-term deals it has signed with major clients, any material change over the next couple of years will prompt the market to adjust.
Even if earnings growth remains high, that could mean a significantly lower forward P/E by late 2028, as investors brace for lower earnings growth in the subsequent years. Let's illustrate what impact that will have on our final answer. Assuming that Broadcom has a forward P/E of 15 by the end of this period (all else remains the same), a $5,000 investment in the company will be worth about $9,669, which I think is much closer to the correct answer, and is more than $3,000 lower than our initial estimate. That's if we change just one assumption. Which inputs are more reasonable?
It's hard to say, but my view is that, assuming an average of 60% (slightly higher, actually) EPS growth for Broadcom through the next two fiscal years and only a slightly lower forward P/E are far too aggressive assumptions, especially considering the company's shares dropped significantly after its latest earnings report, despite its strong results and guidance that implies accelerating sales within its AI chip business.
Is the stock a buy?
Still, Broadcom's leadership in this niche and its wide moat, including its customer relationships and deep expertise, make it likely to continue capitalizing on rapidly expanding AI infrastructure spending. Don't expect the stock to perform as well as it has over the past two years, but it could still deliver steady returns to investors willing to be patient and stay put beyond 2028.
