The Nasdaq Composite has repeatedly reached new highs in 2024, with more than 110 new all-time highs. The record run was fueled by a series of encouraging developments. The accelerated adoption of artificial intelligence (AI) was the initial catalyst for the recovery, but investor sentiment was supported by declining inflation, recent interest rate cuts and the US election results. The tech-focused index is up 43% last year and is up about 30% so far in 2024 (at time of writing). Students of history will note that the rally will likely continue well into 2025.
Stock charts show that the current bull market started in October 2022. While each revival is different, history can provide context. Bull markets historically last an average of more than five years. We’re just over two years into the current run, which suggests it will likely continue next year. Additionally, the Nasdaq has risen an additional 19% on average in the years following gains of 30% or more, suggesting that the coming year could be a good one for the market.
Investors have also embraced the renaissance of stock splits. They examine companies that have split their shares, as this is generally the result of a well-managed company with strong sales and profit growth. That is the case with Broadcom(NASDAQ:AVGO). The stock is up 98% year to date and 2,100% over the past decade (at time of writing). This led to a 10-for-1 stock split, which was completed in mid-July.
Still, despite the recent rally, there’s reason to believe Broadcom’s impressive run will continue into 2025 and beyond. Read on to find out why.
Image source: Getty Images.
Broadcom offers a wide range of semiconductor, software and security products that serve the mobile, broadband, cable and data center industries, yet many investors continue to underestimate its reach. Management estimates that “99% of all Internet traffic flows through some form of Broadcom technology.”
That’s just the beginning. Broadcom is made up of “26 leading semiconductor and infrastructure software divisions,” according to the company. The semiconductor solutions are crucial components in the areas of networking, server storage, broadband, wireless and industrial. At the same time, infrastructure software serves the mainframe, distributed, cybersecurity, storage area networks, and cloud infrastructure spaces.
Broadcom’s massive reach gave the company a strategic advantage when generative AI went viral early last year. Many of its products are essential components in data centers, where most AI processing takes place.
One consequence of the rapid adoption of AI is the struggle to upgrade data centers to handle the rigors of AI. Nvidia CEO Jensen Huang suggests that there will be more than $1 trillion in data center upgrades over the next five years, with another $1 trillion spent to bring new data centers online. That presents a big opportunity for Broadcom.
Earlier this year, the recent Broadcom acquisition was recognized by VMWare Gartner‘s Magic Quadrant as a leader in software-defined wide area networking (SD-WAN) for the seventh consecutive year, demonstrating its critical place within the industry.
The results are convincing. For the fourth fiscal quarter (ended November 3), Broadcom generated revenue of $14 billion, up 51% year over year. Adjusted earnings per share (EPS) of $1.42 rose 31%. Management was clear that rising demand for AI was driving results. AI networking revenues increased 158% year over year, while custom accelerator (XPU) sales doubled and connectivity product revenues quadrupled.
For the upcoming first quarter, Broadcom expects revenue of $14.6 billion, higher than Wall Street expectations of $14.47 billion. Management is also guiding further margin expansion, which would increase adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to 66% of sales, up from 65% in the fourth quarter.
Looking further ahead, growth is about to accelerate. Management forecasts AI revenues to be between $60 billion and $90 billion in fiscal 2027. Compared to the $12.2 billion in AI revenue it generated in fiscal 2024, this indicates growth of between 391% and 638% over the next three years. The company also announced that it has added two new hyperscale customers – which are not included in the forecasts – suggesting growth could be even more robust.
Wall Street is also bullish. The average analyst price target is around $234 (at the time of writing), which represents a potential upside of 6%. Additionally, 88% of the 43 analysts who weighed in in December rate the stock as a buy or strong buy, with none recommending a sell.
However, Jefferies analyst Blayne Curtis is much more optimistic than his Wall Street colleagues. Just this week, he raised his price target to $300, which represents a potential upside for investors of 36%. He is particularly excited about the possibility of application-specific integrated circuits (ASICs), which he believes will play an increasingly important role in AI. He further notes that Broadcom “is uniquely positioned with AI ASICs that are rapidly growing in complexity and volumes.”
One consequence of the recent price increase is Broadcom’s valuation. The stock currently trades for about 35 times forward earnings, compared to a multiple of 30 for the S&P500. While that is admittedly a premium valuation, it should not be viewed in a vacuum. Broadcom has easily outperformed the broader market over the past five years, with gains of 592%, roughly seven times the return of the broader index.
Looking through that lens, I’d say Broadcom is a bargain.
Consider the following before buying shares in Broadcom:
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Danny Vena has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
History says that the Nasdaq will boom in 2025. 1 stock split share to buy before that happens. was originally published by The Motley Fool
