Each of the six publicly traded companies with a market capitalization of more than $1 trillion has played a significant role in the advancement and development of artificial intelligence (AI). Four of them have split their shares in the last five years.
It may not be long before another AI stock split joins the ranks. Broadcom (NASDAQ:AVGO) has emerged as a major supplier of AI data center chip designs, complementing its other semiconductor designs and enterprise software businesses.
With a market cap of around $850 billion, Broadcom needs to post an 18% gain at the time of writing to reach the $1 trillion milestone. Here’s why it will definitely get there.
A diversified semiconductor and software giant
Broadcom’s roots are in semiconductor design, and it has developed a strong portfolio of intellectual property that has served it well in the AI ​​arms race among major tech companies.
Broadcom’s networking chips provide essential infrastructure for AI data centers. While Nvidia‘s graphics processing units (GPUs) are making all the headlines, it’s Broadcom’s chips that allow a company to make the most of the billions of dollars it spends on those GPUs. Broadcom’s networking chips ensure data moves quickly and efficiently from one server to another, improving data center efficiency. No company can compete with Broadcom’s technology in this area, and few customers would risk switching to a competitor due to the potential impact of using an inferior chip design and other switching costs.
Broadcom also has a growing custom chip design business driven by AI spending. Broadcom Designs Alphabet‘s tensor processing unit (TPU), which Apple used to train Apple Intelligence’s large language model (LLM). It’s also behind Meta’s MTIA chips, which help train and run Meta’s Llama model. Generative AI leader OpenAI is also reportedly working with Broadcom for its own custom chip designs.
Broadcom isn’t just an AI chipmaker, though. It has a dominant position in wireless phone chips that improve 5G reception while extending battery life. It also makes WiFi and Bluetooth chips. The chips can be found in Apple’s iPhone and many other high-end smartphones.
Broadcom has also made strategic acquisitions of enterprise software vendors in recent years, including Symantec and VMWare. It uses a land-and-expand strategy focused on selling multiple software solutions to a small group of large enterprise customers. That provides a growing and very persistent source of recurring revenue.
Powering the future of artificial intelligence
Broadcom’s network chips already provide essential infrastructure for AI. In the coming years, more and more major tech companies are also likely to rely on their custom AI accelerators. Google and Meta are already spending heavily on custom silicon designed by Broadcom.
As AI development matures, investors can expect a greater focus on custom chip designs like those from Google and Meta. That’s because these chips can be cheaper than general-purpose GPUs, and they use less energy for the same tasks. As a result, I expect them to account for a growing share of silicon in AI data centers.
Broadcom’s AI chips business is still a small part of the business, but it is growing extremely quickly. Sales of Ethernet switching chips grew more than four times year over year in the third quarter, and sales of AI accelerators grew 3.5 times year over year. Both should continue to generate strong results for Broadcom going forward.
The Road to $1 Trillion
Broadcom’s stock currently trades for about 29.5 times 2025 earnings estimates.
Broadcom should see better earnings next year as it cuts excess operating costs related to its VMWare acquisition in late 2023. These reductions should result in strong operating margin expansion. In fact, the long-term potential for operating leverage remains high even as the AI ​​chip business expands and recurring revenue from enterprise software operations increases. Over time, Broadcom should see earnings growth exceed revenue growth.
AI chips can drive extremely strong revenue growth in the coming years. And with improved operating leverage, it should deliver the earnings growth needed to justify the price-to-earnings (P/E) ratio.
To reach a $1 trillion valuation, Broadcom stock will need to reach a share price of around $214. That would put the valuation at about the same 29 times forward price/earnings at the end of next year, based on current analyst estimates. If Broadcom can exceed expectations, it could reach the $1 trillion milestone even sooner.
Based on the current price and current outlook for the company, it appears the stock is trading at fair value and could be worth a spot in your portfolio.
Should You Invest $1,000 in Broadcom Now?
Consider the following before buying shares in Broadcom:
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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. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy holds positions at Alphabet, Apple and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Apple, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
1 Artificial Intelligence (AI) Stock-Split Stock That Joins Nvidia, Apple, Microsoft, Amazon, Alphabet and Meta in the $1 Trillion Club was originally published by The Motley Fool
