Recent advances in the field of artificial intelligence (AI) help illustrate that technology has come to dominate over the past two decades, with tech issues leading the list of the world's most valuable companies. That wasn't always the case. Just 20 years ago, General Electric and ExxonMobile were the leaders in terms of market cap, valued at $319 billion and $283 billion, respectively.
These days, technology rules the roost. Apple, Nvidia, and Microsoft are each worth more than $3 trillion and led the leaderboard at some point in 2024. Other big tech members of the $1 trillion club are also household names, including Amazon, Alphabet, and Meta Platforms, with valuations of between $1.5 trillion and $2.3 trillion.
With a market cap of roughly $797 billion (as of this writing), Broadcom (AVGO -1.47%) seems a shoo-in for membership in this exclusive fraternity. The company supplies a broad cross-section of products that are critical components in data center infrastructure, where most AI processing takes place, and its indispensable technology could be the fuel that drives Broadcom's successful quest for membership.
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Chip shot
As well as being one of the world's foremost custom chipmakers, Broadcom also offers a host of complementary products and services in the mobile, cable, broadband, and data center segments. The company states that "99% of all internet traffic crosses through some type of Broadcom technology." This extensive reach illustrates why Broadcom's technology is a critical part of the generative AI ecosystem, as the technology lives primarily in the cloud and in data centers.
Beyond AI, investors continue to underestimate the opportunity represented by Broadcom's purchase of VMWare late last year. During the recent earnings call, management noted that "VMWare bookings continue to accelerate," amounting to $2.5 billion in Q3, up 32% sequentially.
Furthermore, the company continues to drive down VMWare spending. CEO Hock Tan noted that with the VMWare integration proceeding as expected, Broadcom was on track to deliver on its goal of $8.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2025. Once the process is complete, the company expects to deliver expanding margins and increasing profits.
The results highlight an intriguing opportunity. For its fiscal third quarter (ended Aug. 4), Broadcom delivered revenue of $13.1 billion, which jumped 47% year over year, while its adjusted earnings per share (EPS) increased 18% to $1.24. Management expects this upward trajectory to continue, increasing its full-year revenue forecast to $51.5 billion, representing growth of 44%.
This adds to Broadcom's long history of strong business and financial performance, which has fueled its surging stock price. This, in turn, led the company to declare a 10-for-1 stock split earlier this year, which it completed in July.
The path to $1 trillion
Broadcom's chips and ancillary products -- critical components in data center operations -- give the company an important role in supplying the AI ecosystem. Broadcom is in an enviable position, which will be a key driver in the next stage of its growth.
Wall Street expects Broadcom to generate revenue of $51.7 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 15. If the stock's P/S remains constant, Broadcom will need to generate sales of roughly $65 billion annually to support a $1 trillion market cap.
Analysts' consensus estimates are guiding for revenue growth of 44% in 2024 and 17% in 2025. If the company hits those targets, it will likely achieve a $1 trillion market cap as soon as mid-2026. That said, I believe Wall Street's growth estimates are conservative, as Broadcom has exceeded analysts' expectations in each of the past three quarters. Therefore, it isn't unreasonable to expect more of the same over the coming year.
Accelerating AI spending and the growing adoption of VMWare should give Broadcom multiple paths for robust growth next year, which is why I believe 2025 is a more likely timeframe for the company to join the trillionaire club.
Observations by management seem to support that, as Broadcom is experiencing "strong demand from hyperscalers for both AI networking and custom AI accelerators." Furthermore, commentary from the world's largest cloud infrastructure providers suggests demand won't be slowing for the foreseeable future.
Estimates for the size of the AI market continue to climb, but even the more conservative estimates are compelling. According to Bloomberg Intelligence, generative AI is expected to be a $1.3 trillion market by 2032. McKinsey & Company places the economic impact at between $2.6 trillion and $4.4 trillion annually. While no one knows for sure just how big the AI opportunity will ultimately be, most experts agree it will be much higher than it is today.
Despite Broadcom's impressive gains, it remains attractively priced, currently selling for just 27 times forward earnings, compared to a multiple of 30 for the S&P 500. That's not a bad price for a stock that's delivered total returns (including dividends) of 14,500% since 2009, especially when compared to a gain of just 633% for the broader market.
That's why Broadcom stock is a buy.
