Technological advances over the past 20 years have been nothing short of profound, and nowhere is that progress more evident than in the values of the world's largest companies. Two decades ago, General Electric and ExxonMobil were the world's largest companies by market cap, clocking in at $319 billion and $283 billion, respectively.
Now, the list of the largest companies is dominated by businesses at the cutting edge of technology. Nvidia, Apple, and Microsoft are each worth more than $3 trillion, and each has spent time atop the chart at some point in 2024. Other tech-centric members of the $1 trillion club include Amazon, Alphabet, Meta Platforms, and Tesla, boasting valuations of between $1 trillion and $2.2 trillion.
With a market cap of roughly $812 billion (as of this writing), Broadcom (AVGO -1.47%) seems ordained to earn membership in this exclusive fraternity. The company offers a wide range of products that are staples in the data centers where most artificial intelligence (AI) systems reside, and Broadcom's critical technology could push it past the $1 trillion milestone sooner rather than later.
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A chip off the old block
Broadcom is one of the world's leading custom chipmakers, but also supplies a host of complementary products and services to players in the mobile, broadband, cable, and data center industries. Management estimates that "99% of all internet traffic crosses through some type of Broadcom technology." This helps explain why its technology is crucial to the expansion of generative AI, much of which resides in data centers and the cloud.
Broadcom's acquisition of VMWare last year also represents a compelling opportunity for the company. Management has said it's making progress in converting VMWare's software sales from a perpetual model to a subscription license model, which will continue boosting recurring revenue into 2025. Furthermore, as the integration of VMWare wraps up, Broadcom is guiding for improved operating margins and greater profits.
The results paint a compelling picture. In its fiscal third quarter (which ended Aug. 4), Broadcom's revenue climbed 47% year over year to $13.1 billion, while its adjusted earnings per share (EPS) increased by 18% to $1.24. Management is predicting the growth streak will continue, and boosted its full-year revenue forecast to $51.52 billion, which would amount to growth of roughly 44%.
This maintained the company's track record of consistent operating performance and impressive stock price gains, which prompted the 10-for-1 stock split Broadcom completed in July.
The path to $1 trillion
The tech sector's unmistakable need for Broadcom's chips and ancillary products -- which are critical components in data center operations -- gives it an important role to play in the AI revolution. This position will help fuel its next phase of growth.
According to Wall Street's consensus estimate, Broadcom will generate revenue of $51.67 billion in 2024, giving it a forward price-to-sales (P/S) ratio of almost 16. If the stock's P/S remains constant from here, it will need to generate sales of roughly $64 billion annually to support a $1 trillion market cap.
Analysts' consensus estimates are for revenue growth of 44% in 2024 and 17% in 2025. If the company hits those targets, it could achieve a $1 trillion market cap as soon as 2026. However, it's important to note that estimates regarding the outlook for the AI industry tend to ebb and flow, so how well these forecasts match reality could be impacted by the actual rate of the technology's adoption.
That said, based on the information we have right now, Broadcom could join the fraternity of trillion-dollar companies sooner than later. Management cited AI as one of the driving factors in its fiscal third-quarter success, citing "strong demand from hyperscalers for both AI networking and custom AI accelerators." Recent commentary from the world's largest cloud infrastructure providers suggests that demand is poised to continue.
Estimates regarding the future market for generative AI continue to ratchet higher. The economic impact of the technology is expected to be between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. Its report noted that the estimate effectively doubles if it includes the impact of embedding generative AI into software.
Broadcom's strong results have fueled a surge in the stock price, yet it's still attractively valued at 28 times forward earnings, compared to a multiple of 30 for the S&P 500.
However, Broadcom's stock has gained 11,210% since 2009, compared to just 447% for the S&P, which helps illustrate why the premium is warranted.
