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The custom AI chipmaker’s stock has surged in 2024, but its valuation is still reasonable.
In 2024, shares of semiconductor and infrastructure software maker Broadcom (AVGO -0.33%) have returned 63% through Friday, Dec. 6, compared to the S&P 500‘s return of 29%. The stock has probably gotten a little boost from the company’s 10-for-1 stock split, which occurred in July. The split has made shares more accessible to a wider range of investors.
Broadcom stock’s performance over the last decade is just as impressive. It’s returned 2,140% through Dec. 6, turning a $1,000 investment into $22,400. The broader market returned 252% over the last 10 years.
Broadcom’s past performance is great for folks who have owned the stock for some time. But is Broadcom stock worth buying now as 2025 approaches?
Broadcom’s key stats and business overview
| Market Cap | Dividend Yield | Wall Street’s Projected 5-Year Annualized Earnings Growth | Forward P/E |
|---|---|---|---|
| $839 billion | 1.2% | 20.1% | 29.1 |
Data sources: Yahoo! Finance and finviz.com. P/E = price-to-earnings ratio. Data to Dec. 6, 2024.
Broadcom has a quite involved corporate history. The main thing investors should know is that the company has largely employed a growth-by-acquisitions strategy, which has continued through to recently. In late 2023, Broadcom acquired VMWare, which was a large software company focused on virtualization and cloud services.
Broadcom designs and sells semiconductors, or “chips,” and infrastructure software. The VMWare acquisition gave a big boost to Broadcom’s software business. In the fiscal third quarter, which ended on Aug. 4, Broadcom’s chip segment accounted for 56% of its total revenue and its infrastructure software segment brought in the other 44%.
A growing AI business
Broadcom is a growing player in artificial intelligence (AI). Its AI-related products include custom AI chips and Ethernet networking products used in data centers that process AI workloads.
Broadcom is the leader in making application-specific integrated circuits (ASICs) for large tech companies that speed up the processing of AI workloads. These are custom AI chips, as opposed to AI chip leader Nvidia‘s graphics processing units (GPUs), which are not custom designed, but have wider applications. Broadcom’s custom AI chip customers are known to include Google parent Alphabet and Facebook parent Meta Platforms.
Broadcom did not explicitly state how much total revenue it generated from AI-related products in fiscal Q3. But based on comments from CEO Hock Tan on the earnings call, we can deduce that AI-related revenue was about $3.1 billion to $3.2 billion. That was about 24% of total revenue.
Recent financial performance
Focusing on Broadcom’s most recent quarterly results, rather than those over a longer period, will give investors a clearer picture of its business due to its acquisition of VMWare. This acquisition, which closed in November 2023, was a big one and has significantly affected Broadcom’s business profile and performance.
In its third quarter of fiscal 2024, ended Aug. 4, Broadcom’s revenue grew 47% year over year to $13.1 billion. This growth was primarily driven by its acquisition of VMware. Excluding the contribution from this acquisition, revenue grew 4% year over year. By segment, semiconductor solutions’ revenue grew 5% to $7.3 billion and infrastructure software’s revenue soared 200% to $5.8 billion.
The chip segment’s modest overall revenue growth of 5% year over year was due to weakness in the company’s non-AI chip markets. These include non-AI networking, server storage connectivity, wireless, broadband, and industrial. This weakness is an industrywide phenomenon. The good news is that at least some of these markets appear to have bottomed as their revenue increased on a sequential quarter basis.
The chip segment’s overall revenue growth obscures how fantastic the company’s AI chip business is performing. Revenue from sales of custom AI chips increased three and a half times year over year, CEO Tan said on the earnings call.
As for the bottom line, net income according to generally accepted accounting principles (GAAP) was negative because of a “one-time discrete non-cash tax provision … related to a supply chain realignment,” and acquisition-related costs. Adjusted for one-time items, net income rose 33% to $6.12 billion, which translated to earnings per share (EPS) increasing 18% to $1.24.
Broadcom’s business is very profitable. The company’s adjusted profit margin (adjusted net income divided by revenue) for the quarter was about 47%. For comparison, Marvell Technology, which is the other big player in making custom AI chips for big tech companies, had an adjusted profit margin of about 25% in its fiscal third quarter, reported last week.
Fiscal Q4 results are due on Dec. 12
Investors will have more relevant data soon, likely including guidance for fiscal 2025. Broadcom is slated to report its results for the fourth quarter of fiscal 2024, ended Nov. 3, after the market close on Thursday, Dec. 12.
Management has guided for Q4 revenue of $14 billion, which would equate to growth of 51% year over year. Wall Street is expecting adjusted earnings per share (EPS) to jump 26% year over year to $1.39 and revenue to surge 52% to $14.1 billion.
Stock valuation is reasonable
Broadcom’s stock valuation is relatively reasonable. As of Friday’s close, the stock was trading at 29.1 times the company’s projected (by Wall Street) forward earnings. This is reasonable for a stock of a company:
- That Wall Street expects to grow earnings 27.6% next fiscal year and at an average annual rate of 20.1% over the next five years.
- Whose free cash flow (FCF) regularly exceeds its net income, or earnings.
- That pays a dividend, currently yielding about 1.2%.
Bullet-point No. 2 means the stock’s valuation based on its price-to-FCF ratio has usually been lower than its valuation based on its price-to-earnings (P/E) ratio. And over a longer period, a company’s FCF is a better indicator of its performance than are its earnings, which is just an accounting measure.
Broadcom stock is worth buying
Broadcom’s infrastructure software segment and its AI chip business have significant growth potential. And its stock valuation is reasonable. It seems worth buying.
That said, investors looking for exposure to the fast-growing AI space should invest in several AI companies, not just one. The AI realm is evolving very rapidly and it could prove risky to bet on just one long-term winner, even an established company, such as Broadcom.
