Future of Broadcom Stock: A Three-Year Outlook

Broadcom (AVGO) has proven to be a remarkable investment over the last three years, with its stock price climbing an impressive 240%. This performance significantly outshines the PHLX Semiconductor Sector index, which only saw a 27% gain during the same timeframe.

As investors look ahead, they may be asking whether Broadcom can maintain this growth momentum over the next three years and if it’s still a good time to purchase Broadcom stock after such substantial gains. This analysis will explore the factors propelling Broadcom's success moving forward, evaluate its potential for further growth, and assess its valuation to determine its appeal for investors seeking to add a semiconductor stock to their portfolios.

Key Growth Drivers for Broadcom

Recently, Broadcom released its fiscal fourth quarter results for 2024 (ending on November 3). The company achieved an impressive annual revenue increase of 44%, reaching a record $51.6 billion. Excluding contributions from its recent acquisition of VMware, Broadcom reported a steady organic revenue growth of 9% for the year.

The semiconductor giant also saw its fiscal 2024 adjusted earnings rise to $4.87 per share, showing a 15% improvement from the prior year. What’s particularly promising is Broadcom's forecast for the first quarter of fiscal 2025, indicating that accelerated growth is on the horizon. The company estimates $14.6 billion in revenue for the current quarter, marking a 22% increase compared to the previous year.

While Broadcom has not provided full-year guidance, analysts project a near 19% revenue growth for the current fiscal year, anticipating a total of $61.1 billion. Additionally, further forecasts indicate that the company is likely to achieve a 15% revenue growth rate in the following fiscal years.

One notable point is the significant uptick in revenue predictions for each of the next three fiscal years. This boost is largely due to the surging demand for Broadcom's artificial intelligence (AI) chips, which are crucial for AI model training and improving server connectivity for AI-related tasks.

Broadcom's revenue from AI saw a staggering increase of 220% in fiscal 2024, reaching $12.2 billion. The company expects continued robust growth in its AI division, projecting a 65% year-over-year revenue increase in the current quarter, estimating $3.8 billion from AI chip sales. It is also anticipated that this growth could become even stronger as the year progresses.

Furthermore, Broadcom has recently secured contracts with two additional hyperscale customers for its custom AI processors. These processors are becoming increasingly favored by major cloud service providers seeking alternatives to costly graphics cards from Nvidia for their AI requirements. This expansion in customer base positions Broadcom to capitalize on a wealth of growth opportunities.

Management highlighted during the latest earnings call that the serviceable addressable market for its custom AI accelerators and networking chips could range from $60 billion to $90 billion by fiscal 2027. If we consider a midpoint of $75 billion and assume Broadcom maintains a 50% share of this market, its AI revenue could surge to $37.5 billion in fiscal 2027. This would nearly triple its AI revenue from the last fiscal year. If Broadcom retains its current market share of 60% and the market size reaches $90 billion, AI-related revenue could exceed $50 billion.

This scenario could push Broadcom's total revenue well beyond analysts' current expectations, as it would suggest an additional $40 billion in revenue from AI, assuming other business segments remain steady.

Evaluating the Stock’s Value

Another positive aspect for investors is that Broadcom's stock is trading at an appealing 35 times its forward earnings—a relatively reasonable figure when compared to the Nasdaq-100 index, which shares the same price-to-earnings ratio.

Moreover, Broadcom has a price/earnings-to-growth (PEG) ratio of just 0.63. A PEG ratio below 1 indicates that a stock is undervalued relative to its expected earnings growth over the next five years. This suggests that Broadcom may offer strong value for growth-oriented investors.

Overall, investors interested in adding a fairly priced stock with solid growth potential in the AI sector may find Broadcom a promising option, as it appears well-positioned to continue its upward trend.

Investment, Growth, Analysis