‘The times they are a-changin”, as Bob Dylan once sang.
Industrial and oil companies once topped the list of the world’s most valuable companies, but over the past two decades there has been a paradigm shift at the top. For example, General Electric And ExxonMobil were the largest companies in the world by market capitalization in 2004, with $319 billion and $283 billion respectively.
A lot can happen over the course of twenty years, and now eight of the ten largest companies come from the halls of technology. Microsoft And Apple are locked in an epic battle for the title of ‘the most valuable company in the world’. Each of these currently amounts to around $3.3 trillion – and the top spot has changed hands several times in the past week. Nvidia is hot on their heels with a market cap of $3.2 trillion, well ahead Alphabet And Amazonwith market capitalizations of $2.2 trillion and $1.9 trillion respectively. Metaplatforms is at the back of the $1 trillion club, with a market value of $1.2 trillion. The common denominator that has driven many of these tech stocks higher is the advent of artificial intelligence (AI), and the tech revolution is just beginning.
With a market capitalization of approximately $851 billion (at the time of writing), Broadcom (NASDAQ:AVGO) recently entered the top 10 and seems destined to join this elite association of companies. The company has a unique position in the AI infrastructure, and prevailing secular tailwinds could push it to join sooner rather than later.
Would you like chips with that?
Broadcom delivers a broad range of semiconductor, software and security solutions that reach every corner of the mobile, broadband, cable and data center spaces. In fact, the company notes that “99% of all Internet traffic flows through some form of Broadcom technology.” This illustrates the company’s pivotal place in the AI revolution, as this unique collection of technologies powers the advancement of generative AI, which primarily exists in data centers and the cloud but is rapidly moving to the edge.
The merger of VMWare late last year was a priority for management as Broadcom worked to transition VMWare’s products to a subscription licensing model. Cross-selling of these products to Broadcom’s customer base has begun and is likely to accelerate in the coming quarters.
The results show that business is booming. In the second quarter, revenue rose 43% year-over-year to $12.5 billion, while adjusted earnings per share (EPS) of $10.96 were 6% higher. Management expects robust growth to continue, guiding the increase in full-year revenue guidance to $51 billion, which would represent growth of 42%.
The company’s robust results also prompted Broadcom to announce a 10-for-1 stock split, which has fueled a new wave of interest in the company.
The route to $1 trillion
The extensive reach of Broadcom’s semiconductors and other products, many of which are critical components of cloud and hyperscale data centers, makes it a key player in the AI revolution.
According to Wall Street estimates, Broadcom is expected to generate revenues of $51.24 billion in 2024, giving it a price-to-sales ratio (P/S) of around 16. If the stock’s P/S remains constant, Broadcom will need revenue. of about $60 billion per year to support a $1 trillion market cap.
Interestingly, a quick look at the charts shows that Wall Street is guiding revenue growth of 43% in 2024 and 16% in 2025. If the company meets these targets, it will could be reaching a market capitalization of $1 trillion as early as 2026. Furthermore, given the opportunities presented by accelerated AI adoption, these estimates could ultimately be conservative.
There are indications that Broadcom is on track to achieve these benchmarks sooner or later. Management noted that software revenues increased 175% in the second quarter, while AI revenues increased 280%. Management expects the company’s AI-related revenue to grow to more than $11 billion this year, which would represent 22% of expected revenue for the fiscal year.
AI adoption is just beginning, so there could be much more to come. Generative AI is expected to generate between $2.6 trillion and $4.4 trillion in economic value per year over the next decade, according to global management consultancy McKinsey & Company. If you include embedded software revenues, these figures double.
Excitement over Broadcom’s robust results and stock split have driven its stock price higher, resulting in a commensurate increase in its valuation. The stock is selling for 38 times forward earnings, a premium compared to a multiple of 28 for the stock S&P500.
However, Broadcom shares are up 2,480% over the past decade, compared to just 182% for the S&P, so it’s not an apples-to-apples comparison.
Furthermore, given the breadth of the company’s reach in the AI ecosystem and the vast opportunities at hand, I would suggest that Broadcom’s premium multiple is justified.
Should You Invest $1,000 in Broadcom Now?
Consider the following before buying shares in Broadcom:
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Danny Vena holds positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 Unstoppable Stock That Could Join Microsoft, Apple, Nvidia, Alphabet, Amazon and Meta in the $1 Trillion Club was originally published by The Motley Fool
