With shares up more than 500% in the past five years, Broadcom (NASDAQ:AVGO) has been a big winner in the artificial intelligence (AI) boom. Let’s dig deeper into the stock’s pros and cons to determine whether it can generate similar returns over the next five years.
Why Broadcom?
The current version of Broadcom was created from the 2016 merger Avago Technologies And Broadcom Corporation to unlock synergies and better meet the demands of major customers. It specializes in semiconductor products, enterprise software and data center equipment. And it showed up next to it Nvidia as an ideal way for investors to bet on the picks and kicks of the AI gold rush.
Unlike Nvidia, which is best known for its high-end general purpose graphics processing units (GPUs) like the H100 and A100 (which train ChatGPT), Broadcom focuses on customer customization.
The company is a leader in the market for application-specific integrated circuits (ASICs), which are chips designed specifically for a particular company’s use case. Broadcom’s more than three decades of custom chip manufacturing has given the company the experience and customer relationships needed to quickly respond to growing AI-related demand. The company’s key customers include: alphabet‘S Googling and Metaplatforms.
Business is booming
AI-related excitement is helping to boost Broadcom’s operating results. Second-quarter revenue rose 43% year over year to $12.49 million, driven by demand for data center hardware and Broadcom’s recent acquisition of VMware, a software company specializing in virtual machines, which run programs and deploy apps in the cloud.
While Broadcom is far from a pure AI play, its presence in several technology niches provides welcome diversification. And while this strategy could limit near-term growth versus more specialized rivals like Nvidia (where revenue rose 262% in the most recent quarter), it gives Broadcom investors more security because it is less vulnerable to a possible slowdown in demand for AI chips. .
Over the next five years, the chip industry may eventually face overcapacity as technological progress begins to level off and data center customers stop upgrading their hardware as often. So Broadcoms diversification could become more useful after a while.
Broadcom’s result is also impressive, with adjustments earnings before interest, taxes, depreciation and amortization (EBITDA) of $7.43 billion – a whopping 59% of sales. This measure adds non-cash expenses such as stock-based compensation and temporary restructuring costs related to the recent VMware acquisition.
Are Broadcom shares a buy before the stock split?
Despite healthy fundamentals, Broadcom started to attract the attention of many retail investors after announcing a huge 10-for-1 price. stock split, designed to cut its four-digit share price by 90% when it goes live on July 15. Stock splits do not change a company’s market capitalization (the value of all its shares combined) or its valuation relative to earnings. But they can make stocks more liquid and serve as a powerful signal that a company’s equity is moving in the right direction.
But regardless of the stock split, Broadcom seems like a solid way to bet on the long-term future of the AI industry.
The company is growing at a respectable pace, and its diversification into different types of technology could provide a layer of protection against a potential slowdown in chip demand. Immediately forward price-earnings ratio (P/E) multiple of 38, it’s also relatively affordable compared to Nvidia, which trades at 52 times forward earnings. Broadcom appears poised to outperform over the next five years and beyond.
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. 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. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Where will Broadcom stock be in five years? was originally published by The Motley Fool
