Broadcom Poised for Trillion-Dollar Status Amid AI Growth

Over the last two decades, the landscape of the largest companies has shifted dramatically. In 2004, General Electric and ExxonMobil topped the list, with market values of $319 billion and $283 billion, respectively. Today, tech giants dominate the rankings.

Modern leaders such as Nvidia, Apple, and Microsoft each enjoy valuations exceeding $3 trillion, having all held the title of largest firm at different points in 2024. Additional technology-driven entrants in the $1 trillion club include Amazon, Alphabet, Meta Platforms, and Tesla, which range from $1 trillion to $2.2 trillion in worth.

Broadcom (NASDAQ: AVGO), with a market cap around $812 billion, is positioning itself to join these ranks. The company creates essential products for data centers that power most artificial intelligence (AI) operations, hinting that it could surpass the $1 trillion mark in the near future.

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Leading in Chip Technology

Broadcom stands out as a top custom chipmaker while also offering various products and services for mobile, broadband, cable, and data center businesses. The company claims that “99% of all internet traffic crosses through some type of Broadcom technology,” highlighting its crucial role in the growth of generative AI, primarily housed in data centers and the cloud.

Last year, Broadcom’s acquisition of VMWare opened new avenues for growth. The management is shifting VMWare’s software sales from a onetime purchase model to subscriptions, enhancing recurring revenue through 2025. As integration with VMWare completes, the company anticipates better operating margins and higher profits.

The third quarter results reveal impressive growth. For the quarter ending on August 4, Broadcom’s revenue surged 47% year over year to $13.1 billion. Adjusted earnings per share (EPS) also rose by 18%, reaching $1.24. In light of this momentum, management has revised its full-year revenue forecast to $51.52 billion, projecting an overall growth of around 44%.

This consistent performance and solid stock gains prompted a 10-for-1 stock split in July, further underlining investor confidence.

Charting a Course Toward $1 Trillion

The growing demand for Broadcom’s chips for data centers places the company at the forefront of the AI transformation, positioning it for substantial growth ahead.

Wall Street anticipates Broadcom will achieve revenues of $51.67 billion in 2024, which translates to a forward price-to-sales (P/S) ratio nearing 16. To reach a market cap of $1 trillion while maintaining this P/S ratio, Broadcom would need to generate about $64 billion in annual sales.

Analysts project a 44% revenue increase in 2024, with an additional 17% growth in 2025. If these predictions hold true, Broadcom could attain a $1 trillion valuation by as early as 2026. It is essential to recognize that estimates regarding the AI landscape can fluctuate, affecting the accuracy of these forecasts depending on real-world technology adoption rates.

So far, broad interest from major cloud providers in AI networking and custom accelerators indicates strong ongoing demand. Management noted AI’s significant role in the company’s recent success, which positions Broadcom well for future growth.

The projected future market for generative AI continues to expand. McKinsey & Company estimates the economic impact could reach between $2.6 trillion and $4.4 trillion annually in the next ten years, with the potential doubling if generative AI integrates into software.

Broadcom’s strong financial results have propelled its stock price, maintaining a reasonable valuation at 28 times forward earnings, especially when compared to the S&P 500 with a multiple of 30. Since 2009, Broadcom’s stock has soared 11,210%, significantly outpacing the S&P’s 447% climb, justifying its high valuation in the market.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, holds a position on The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also on the board. Randi Zuckerberg, a former director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, serves on the board. Danny Vena has investments in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool advises holding shares in and endorses Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Furthermore, The Motley Fool advises Broadcom and GE Aerospace, and recommends certain options for Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein reflect those of the author and do not necessarily represent those of Nasdaq, Inc.