Broadcom (NASDAQ:AVGO) has been an excellent investment over the past three years, as the semiconductor giant’s shares have risen as much as 240% during this period, outpacing the gains of 27% of the US economy. PHLX semiconductor sector index over the same period.
Investors may be wondering whether this chipmaker has enough fuel in the tank to sustain its impressive rally over the next three years and whether it’s worth buying Broadcom stock after the solid gains it’s already posted . In this article, we’ll examine Broadcom’s catalysts for the next three years, see if this semiconductor stock is capable of offering more upside potential, and analyze its valuation to find out if it’s still a good bet for investors looking for a want to add chip. add stocks to their portfolios.
Broadcom recently announced results for the fourth quarter of fiscal 2024 (which ended on November 3). The company’s annual revenue grew 44% from the previous year to a record $51.6 billion. Broadcom’s organic revenue growth was 9% the following year, excluding the contribution from VMware, which was acquired in November last year.
The chipmaker’s non-GAAP (adjusted) fiscal 2024 earnings were $4.87 per share, a 15% improvement from the prior year. The good part is that Broadcom’s guidance for the first quarter of fiscal 2025 suggests the company is on track to grow at a faster pace this year. The company has forecast revenue of $14.6 billion for the current quarter, which would be a 22% increase from the same period a year ago.
Although Broadcom did not provide full-year guidance, analysts expect the company’s revenue to rise nearly 19% to $61.1 billion in the current fiscal year. Better yet: the semiconductor specialist’s turnover is also expected to show a growth of 15% in the coming financial years.
The important thing to note in the chart above is that Broadcom’s revenue estimates have been significantly increased for all three fiscal years. That can be attributed to fast-growing demand for Broadcom’s artificial intelligence (AI) chips, which are deployed in data centers for AI model training and inference, and to enable faster connectivity between servers to tackle AI workloads.
More specifically, Broadcom’s AI revenues increased by a whopping 220% to $12.2 billion in fiscal 2024. The company also expects solid growth in the AI sector in the current quarter, forecasting a 65% year-over-year increase in revenue from AI chip sales to $3.8 billion. However, don’t be surprised to see Broadcom’s AI revenue growth get even better as the year progresses.
That’s because two additional hyperscale customers have selected Broadcom’s custom AI processors for deployment. The custom chips are already being used by major cloud service providers looking to reduce their dependence on expensive graphics cards Nvidia for their AI needs. The expansion of the company’s customer base will put it in a stronger position to make the most of a huge growth opportunity.
Broadcom management noted during its last earnings conference call that the usable market for its custom AI accelerators and networking chips could be between $60 billion and $90 billion in fiscal 2027. Assuming the market size would end up somewhere in the mid-$75 billion range, and Broadcom manages to even maintain a 50% share of the custom chip market at that point, up from the current 55% to 60% market share , according to JPMorganAI revenues could reach $37.5 billion in fiscal year 2027.
That would be nearly triple the AI revenue Broadcom generated in the previous fiscal year. However, if Broadcom manages to keep its share of the custom chip market at 60%, and the company estimates the market size is indeed $90 billion, then revenue from AI-related sales could easily top 50 billion dollars could exceed.
In that case, Broadcom’s total fiscal year 2027 revenues could be well above analyst expectations seen earlier in the chart, as incremental AI revenues could rise by about $40 billion from previous levels year (assuming Broadcom’s other business segments do not experience any losses). grow).
The good thing about Broadcom is that it still trades at an attractive 35 times forward earnings. That’s not very expensive if we consider that the Nasdaq-100 index (using the index as a proxy for technology stocks) has an identical price-to-earnings ratio.
Furthermore, Broadcom’s price-to-earnings-growth ratio (PEG ratio) is just 0.63 according to Yahoo! Financials, based on the five-year earnings growth the company is expected to achieve. A PEG ratio of less than 1 means a stock is cheap relative to its estimated earnings growth over the next five years, and Broadcom is quite attractive on this front.
So, investors looking to add an AI stock that is attractively valued and can deliver strong profits over the next three years may want to consider buying Broadcom as it appears well-positioned to continue its rally.
Consider the following before buying shares in Broadcom:
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JPMorgan Chase is an advertising partner of Motley Fool Money. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in JPMorgan Chase and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Where will Broadcom stock be in three years? was originally published by The Motley Fool
