Broadcom’s Growth Amidst Tough Market Conditions Signals Investment Potential

In 2023, only 27% of the stocks in the S&P 500 outperformed the overall index, marking the lowest percentage in three decades. This figure saw a slight increase to 28% in 2024. Such low numbers suggest that investing in an S&P 500 index fund could be a smarter move than attempting to time the market with individual stocks. Nevertheless, some components of the S&P 500, particularly those showing consistent market outperformance, may still be viable options for long-term investments.

Broadcom Stands Out in a Challenging Market

Among the outperformers is Broadcom (NASDAQ: AVGO), which transformed from Avago to Broadcom following a significant acquisition in 2016. Over the past five years, Broadcom’s stock has increased by over 680%, while the S&P 500 has approximately doubled during the same timeframe.

Before Avago’s acquisition of Broadcom for $37 billion, the former focused on a multitude of chip types, including wireless and optical chips. Although the “new” Broadcom does not manufacture high-end chips, its products are pivotal for various enterprise and mobile applications.

Rapid Growth Through Diversification

From fiscal 2016 to fiscal 2024, which concluded last November, Broadcom’s revenue grew at a compound annual growth rate (CAGR) of 18.5%. Key to this growth has been a series of strategic acquisitions, including Brocade in 2017, CA Technologies in 2018, Symantec’s enterprise business in 2019, and VMware in 2023.

These acquisitions have allowed Broadcom to transition from a solely chipmaker to a diversified technology company, with 42% of its revenue generated from infrastructure software in fiscal 2024. The remaining 58% is derived from semiconductor solutions. This diversification helps the company mitigate the cyclical downturns inherent to the semiconductor market while also accessing the expanding cloud and cybersecurity sectors.

Projecting Future Growth in AI Market

In fiscal 2024, Broadcom’s AI chip sales increased by 220% to $12.2 billion, representing 41% of its semiconductor revenue and 24% of total revenue. This growth offset declines in sales associated with non-AI chips and infrastructure software, leading to a 44% increase in total revenue, driven by the VMware acquisition.

During the first quarter of fiscal 2025, AI-oriented revenue jumped 77% year over year to $4.1 billion. Broadcom anticipates further growth, predicting a 44% increase in AI revenues to reach $4.4 billion in the second quarter. While the company doesn’t produce high-powered data center GPUs like Nvidia, it clearly benefits from the burgeoning AI sector.

Evaluating Risks and Market Conditions

Despite strong performance, Broadcom faces macroeconomic challenges. Companies may reduce spending on AI and cybersecurity services due to tariffs. Trade tensions could also disrupt supply chains. Key customers, such as Apple, may reduce orders as they navigate these complexities.

Analysts project that from fiscal 2024 to 2027, Broadcom’s revenue will increase at a CAGR of 17%, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to grow at a CAGR of 21%.

Is Now the Time to Invest in Broadcom?

With an enterprise value of $1 trillion, Broadcom’s stock is valued at 24 times this year’s adjusted EBITDA. As long as its AI business continues expanding, there is potential for the stock to outperform the market. While it may experience volatility this year due to external factors, it remains an appealing option for long-term investors.

Should You Invest $1,000 in Broadcom Now?

Before considering an investment in Broadcom, be aware that other stocks may currently present higher potential. A recent analysis has listed what they view as the 10 best stocks to buy now, and Broadcom isn’t included in that selection.

Historically, early investments in recommended stocks have yielded significant returns, such as in Netflix and Nvidia. It’s essential to conduct thorough research before proceeding.

Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Nvidia, and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

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