Apple was the founding member of the exclusive $1 trillion club in 2018. Berkshire Hathaway and Warren Buffett’s Taiwan Semi are the newest members, joining in recent months. And despite not joining until 2023, Nvidia has surpassed tech giants like Microsoft to become the second most valuable company in the world, thanks to rising demand for its artificial intelligence (AI) data center chips.
I predict another company will join them. Broadcom(NASDAQ:AVGO) has a market capitalization of $840 billion at the time of writing, after an incredible 527% increase in its shares over the past five years. Like Nvidia, Broadcom is experiencing incredible demand for its AI data center hardware, and that could be the company’s ticket to the $1 trillion club in 2025.
Broadcom stock only needs to rise another 19% to get there, and with two full months to go in 2024, I wouldn’t rule out the possibility that it could cross the $1 trillion mark before the new year. But this is why I think 2025 is a more realistic goal.
Broadcom has a history of innovation that spans decades. It pioneered everything from optical mouse sensors for computers to fiber optic transmitters for data communications. However, as of 2016, it evolved into much more than a semiconductor and electronics company.
That was the year Broadcom merged with chip giant Avago Technologies. Since then, it has spent nearly $100 billion acquiring other companies, including semiconductor equipment supplier CA Technologies, cybersecurity giant Symantec and cloud software provider VMware. Each of them contributes to Broadcom’s growing portfolio of AI products and services.
On the hardware side, Broadcom has had incredible success delivering custom AI accelerators (a type of chip used to process AI workloads) to large-scale customers, which typically include Microsoft, Amazon, and Alphabet. During the recent third quarter of 2024 (ended August 4), Broadcom said sales of its AI accelerators were three and a half times higher than the same period a year ago.
The company also provides Ethernet switches for data centers, which control how quickly information travels between chips and devices. Many AI data centers cluster tens of thousands of graphics processing units (GPUs) or accelerators together. High-quality networking equipment ensures that developers can build AI models at the fastest possible speed, which also keeps costs down.
Broadcom said sales of its Tomahawk 5 and Jericho3-AI Ethernet switches quadrupled (year over year) in the third quarter. That’s not surprising given the strength of its accelerators business, and Nvidia’s GPU business for that matter. Tech giants are currently spending tens of billions of dollars building AI data centers, which is a powerful tailwind for Broadcom’s networking equipment.
Image source: Getty Images.
Broadcom generated total revenue of $13.1 billion across its businesses in the third quarter, up 47% from the same period last year. Of that, $3.8 billion was attributed to the inclusion of VMware revenue. Broadcom completed its acquisition of that company in 2023 and only started reporting its revenue on a consolidated basis this year, temporarily inflating its overall revenue growth.
Broadcom said AI products and services contributed $3.1 billion to total revenue this quarter, and could be the fastest-growing part of the entire organization going forward. In the upcoming fourth quarter, Broadcom expects to generate $3.5 billion in AI revenue. This will represent a sequential increase of over 10%, compared to the forecast sequential growth of only 6.8% for total revenue (expected to reach $14 billion).
Broadcom is on track to generate a record total revenue of $51.5 billion in fiscal 2024. The company originally expected AI to account for $11 billion of that figure, but the segment was so strong that management recently raised its forecast to $12 billion.
Broadcom isn’t consistently profitable under GAAP accounting, so we can’t use the traditional price-to-earnings (P/E) ratio to value the stock. However, we can use the price-to-sales ratio (P/S), which divides the company’s market capitalization by its last twelve months’ sales.
Based on that calculation, Broadcom’s price-to-earnings ratio is currently 17.6. To be clear, that’s not cheap: It’s almost double the stock’s average price-to-earnings ratio of 8.9 over the past five years.
AVGO PS Ratio Chart
However, Broadcom’s strong AI growth beneath the surface of total revenue is tempting investors to pay a premium for its stock. As I said, Broadcom only needs to gain 19% from now on to join the $1 trillion club, so if the price-to-earnings ratio remains constant, the company won’t need to gain more in fiscal year 2025 (which starts in December of this year). simply grow its revenue by 19%. ) to get there.
Wall Street expects Broadcom’s revenue to grow 17.5% in fiscal 2025, which is in the ballpark. But considering the company increased its AI revenue forecast for fiscal 2024 by as much as $1 billion in the last quarter alone, there’s a very good chance that The Street’s estimate for next year is low.
Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion building AI infrastructure over the next five years. If he’s right, I think there’s a good chance Broadcom will blow away all expectations in 2025.
The main risk in my forecast is that Broadcom’s price-to-earnings ratio could shrink as investors turn away from stocks with high valuations, which could boost profits. year on his journey to the $1 trillion club. That’s something to keep in mind before you get in. But as long as investors maintain a long-term horizon of five years or longer, they still have the potential to do very well in this stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, 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. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. 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.
Prediction: 1 Unstoppable Stock Will Join Nvidia, Apple, Microsoft, Amazon, Alphabet and Meta in the $1 Trillion Club by 2025 Originally published by The Motley Fool
