Few stocks had an end to 2024 like Broadcom (AVGO -3.29%). Its December gains look even more impressive considering how large the company was before its latest massive run-up. In November, Broadcom had already crossed the $800 billion mark. Now, it's a member of the exclusive $1 trillion club.
After the stock's recent surge, many might wonder if it can keep the momentum going in 2025. After all, its was management's comments about the outlook for 2025 that helped spur the rally.
Broadcom's business has a wide reach
Broadcom split its stock 10-for-1 on July 15. So this latest run-up has nothing to do with the stock split, only its business results and its outlook.
Broadcom is involved in multiple industries. Its products include connectivity switches used in data centers, custom AI accelerator chips, mainframe software, cybersecurity software, and virtual desktops. Not all of these product lines were grown organically; many came to the portfolio through acquisitions and mergers, such as last year's $69 billion purchase of virtualization software specialist VMware.
That acquisition skewed Broadcom's results somewhat, making its revenue growth rate look higher than it was. In its fiscal 2024 Q4, which ended Nov. 3, Broadcom's revenue rose 51% year over year. However, on an organic basis -- stripping out the impact of VMware -- revenue only rose 11%. This is an important caveat, as VMware's revenue wasn't included in 2023 year's results.
There are also questions about VMware's long-term viability. Many companies have called out Broadcom for hiking prices massively after the acquisition. AT&T (T -1.77%) stated that the prices it was paying for VMware's products rose 1,050% in the most recent billing cycle, prompting the telecom giant to take legal action. With a significant chunk of customers unhappy over similar price hikes, VMware could see trouble ahead.
So, why did the market send this company up by 40% following its Q4 earnings report when it only delivered 11% organic growth and its moves with its latest acquisition are generating bad optics? It all has to do with its AI product line.
Can AI revenue growth push Broadcom to be a successful investment?
AI-related revenue from two product lines has been a major part of Broadcom's investing thesis: networking switches and custom AI accelerators. These two helped drive 158% year-over-year revenue growth in its networking division in Q4, and management doesn't expect that growth to slow down anytime soon, as 2025 is expected to be another strong year.
Obviously, the networking division's wins are major news for Broadcom, but with the overall company only growing by 11% organically, did it really deserve that rally? After all, Wall Street only expects 19% revenue growth from it in fiscal 2025.
Based on Broadcom's valuation of 36.6 times forward earnings, it's clear that the stock has become pricey relative to its expected growth.
AVGO PE Ratio (Forward) data by YCharts.
The latest round of AI hype pushed the stock higher, but sales of the company's other product lines aren't growing nearly as fast as its AI offerings.
As a result, I think investors would be better off looking elsewhere for AI investments. For example, Taiwan Semiconductor Manufacturing, which makes the chips for Nvidia GPUs and the chips for many of Broadcom's products, is projected to grow its top line by 26% in 2025, and trades at 23 times forward earnings.
While Broadcom's AI-related growth is impressive, its stock is too expensive to buy right now. Plenty of other viable options are available that are growing more quickly and trading at cheaper valuations.
