The US stock market has demonstrated remarkable resilience and growth over the past decade, despite multiple economic challenges and geopolitical pressures. This environment has helped pave the way for fast-growing companies such as Nvidia, Apple, Amazon, Alphabet, MetaplatformsAnd Microsoft to reach the coveted market cap of a trillion dollars.
These companies have demonstrated powerful and scalable business models, visionary management, and rapid organic and inorganic market expansion. Furthermore, these companies have quickly adopted technologies such as data analytics, artificial intelligence (AI) and cloud computing.
Only a few other companies share similar characteristics and may be the next to cross the trillion-dollar market cap mark by 2030. This is why Broadcom (NASDAQ:AVGO) fits the bill and could soon join the trillion dollar club.
AI catalyst
Increasing demand for accelerated computing infrastructure and AI-driven data centers have been the key growth catalyst for Broadcom in recent years, especially for its networking business. In the first quarter of 2024 ended Feb. 4, Broadcom’s AI revenues quadrupled year over year to $2.3 billion, offsetting cyclical slowdown in other businesses. The company now expects AI-related revenues to make up nearly 35% of semiconductor sales of $10 billion in fiscal 2024, up from the previous estimate of $8 billion.
This upward revision can mainly be attributed to solid demand for custom AI chips and networking solutions such as Tomahawk 5 800G switches, Ethernet, digital signal processing (DSP) platforms and optical components by large-scale enterprises using AI data centers and hyperscale. customers.
In addition to meeting enterprise AI demands, Broadcom’s networking solutions are also widely used in consumer-facing AI applications. In its Q1 2024 earnings call, management highlighted strong demand for the company’s custom AI chips at two hyperscalers.
While the company did not reveal the names of these customers, many analysts have focused on Alphabet and Meta Platforms. Because these customers hold vast amounts of data and have a very large subscriber base, they will benefit significantly from using custom AI chips in specific areas such as search, SEO and digital marketing. Because Broadcom appears to have built deep, strategic, and multi-year relationships with these hyperscalers, it is well-positioned to develop custom AI chips that meet their specific needs.
Broadcom has a proven track record of designing and manufacturing high-performance and low-power custom AI chips, as well as multiple AI-optimized networking components that can handle complex workloads for foundational models and large language applications. Coupled with the company’s long-term relationships with its customers and a supportive software ecosystem, Broadcom is poised to thwart competition from new players in the custom silicon space.
Acquisition of VMware has a tailwind
The acquisition of VMware, a player in semiconductor and infrastructure software solutions, is also proving to be an important growth catalyst for Broadcom. In the first quarter, the company’s infrastructure software revenue rose 153% year over year to $4.6 billion, with VMware contributing nearly $2.1 billion during the 10.5 weeks of the quarter (as the acquisition closed in November 2023 was completed).
Consolidated software bookings rose nearly three times year over year to $1.8 billion in the first quarter and are expected to reach $3 billion in the second quarter. Broadcom expects VMware portfolio revenue to grow at a double-digit rate every quarter throughout fiscal 2024.
Broadcom’s VMware strategy consists primarily of upselling VMware Cloud Foundation (VCF) to existing customers, especially those already running compute workloads with vSphere virtualization tools. VCF is a complete software stack, spanning compute, storage and networking capabilities, acting as an alternative and complement to public cloud platforms for customers’ on-premises data centers.
The company is focused on developing an enhanced VCF stack to sell to its 2,000 largest strategic customers, many of whom require a hybrid cloud solution (mix of private and public cloud infrastructure) for their on-premise distributed data centers. Broadcom has also partnered with Nvidia to create the VMware Private AI Foundation, which will allow VCF to run GPUs. This initiative helps to further stimulate the demand for venture capital.
The global virtualization software market is expected to grow at a compound annual rate of 22.3%, from $40 billion in 2023 to $300 billion in 2033. Broadcom appears well-prepared to capitalize on this opportunity, thanks to the synergies between its software offerings and the acquired VMware. portfolio. The company expects total software revenues to reach $20 billion in fiscal 2024, which ends Oct. 31.
Diversified customer base
Broadcom’s hardware and software offerings are used in multiple end markets, including smartphones, telecommunications and a variety of industrial applications. The diversified customer base has made the business as a whole resilient, as fluctuations in some end markets can be partially offset by others.
Valuation
Broadcom shares currently trade at a price-to-sales ratio (P/S) of 16.6, significantly higher than their five-year average of 9.3. However, given the company’s ability to capitalize on growing demand for accelerated computing and data center infrastructure across industries, this high valuation seems justified.
The company is poised to generate revenues of $50.2 billion in fiscal 2024. Assuming the price-to-earnings ratio remains constant (due to AI tailwinds), the company will need to grow its revenue to about $61 billion to support a market cap of $1 trillion. This seems like a very achievable goal, as analysts expect Broadcom’s revenue to grow to $62.8 billion by fiscal 2026.
Therefore, it makes sense for long-term retail investors to consider buying at least a small stake in this AI-powered stock.
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. Manali Pradhan has no position in any of the stocks mentioned. 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 Nvidia, Microsoft, Apple, Amazon, Alphabet and Meta in the $1 Trillion Club was originally published by The Motley Fool
