Broadcom (NASDAQ:AVGO) stock saw a 51% rise in value year-to-date and over a 500% increase in five years. The company’s second-quarter revenue reached $12.5 billion, up 43% year-over-year, with AI products hitting a record $3.1 billion. Following its VMware acquisition, Broadcom raised its fiscal 2024 forecast to $51 billion.
Broadcom supplies crucial components for data centers, including networking chips and accelerators. AI revenue, though currently small at $3.1 billion, is projected to rise significantly, from under 5% in 2021 to 25% by year-end.
With a strong buy rating and a projected 20% upside, Broadcom’s talks with OpenAI could boost its AI business and shareholder returns. Here’s more on why Broadcom could be worth considering as a top chip stock in a diversified growth portfolio right now.
AVGO Soared After Stock Split Announcement
Recently, Broadcom was among the two major chipmakers that issued a 10-for-1 stock split. This followed significant growth driven by AI, with Nvidia (NASDAQ:NVDA) continuing to lead the way. I’m of the view that this stock split is just one key catalyst to focus on. But it’s clear that when stock prices soar to astronomical heights, a broadening out of the investor base can be bullish for a given stock.
On a comparative basis, Broadcom’s valuation is currently cheaper than Nvidia’s based on forward earnings ratios. Despite Nvidia’s hype, Broadcom presents a better investment opportunity due to its lower price and favorable long-term prospects. Investors with gains in Nvidia might consider reallocating some funds to Broadcom for future AI growth.
As a rotation takes place more broadly in the market, and diversification and more defensive exposure become more important for investors, I think having a diversified basket of chip stocks relative to owning one specific name may become a strategy many focus on. If this is the case, Broadcom’s upside relative to Nvidia’s could be attractive, as this rotation unfolds.
Broadcom Is Bigger Than We Think
As one of the major players in the semiconductor space, Broadcom ranks 13th worldwide in value, surpassing companies like Intel (NASDAQ:INTC), Samsung, and even Nvidia rival AMD (NASDAQ:AMD). The company might develop AI chips for OpenAI, potentially a game-changer. JPMorgan forecasts Broadcom could see $150 billion in AI revenue over five years, with a 30%-40% annual growth rate.
The company achieved a 76.2% gross margin in Q2 2024, with its software segment margins coming in at an impressive 88% and its semiconductors business at 67%. The company’s operating income was $7.1 billion, yielding a 57% operating margin, improving to 59% excluding transition costs.
Despite lower semiconductor margins due to the AI accelerator mix, Broadcom’s strong profitability and operational efficiency highlight its leadership in AI and secure position in the market. Assuming the company’s fundamentals continue to improve, AVGO stock appears to be well-positioned to benefit both from organic demand growth, as well as potential multiple expansion. And given where peers like Nvidia trade at, it’s clear there’s plenty of room for upside multiple expansion with this name on a relative basis.
AVGO Stock Still Looks Like a Buy
Broadcom dominates data center networking chips with 80% market share and 60% in ASICs for AI. With anticipated market growth—25% annually for networking chips and 42% for AI chips—Broadcom’s non-GAAP EPS is expected to grow 24% annually through fiscal 2025. Its current valuation of 36.2 times non-GAAP earnings appears reasonable, making it a strong semiconductor investment for those looking to bet on continued AI infrastructure growth.
In my view, investors looking to broaden their exposure to the chip space can’t really go wrong owning this name for the long term. While Broadcom may be a much more “boring” option in this sector, boring can be good for those with longer-term investing time horizons and a penchant for value. Presently, Broadcom’s status as a top growth at a reasonable price option shouldn’t be overlooked. At least, that’s my view.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.