Nasdaq Shatters Records: Broadcom Poised for Continued Growth

The Nasdaq Composite has soared to new heights in 2024, reaching over 110 all-time highs. This remarkable surge has been driven by several promising factors. Initially, the rapid adoption of artificial intelligence (AI) sparked the rebound, which has since been supported by declining inflation, recent interest rate cuts, and favorable U.S. election outcomes. The tech-heavy index increased by 43% last year and has risen approximately 30% in 2024 (as of this writing). Historical trends suggest the rally could persist into 2025.

Tracking the Bull Market

Analysis of stock trends shows that this current bull market began in October 2022. Although each market cycle has its unique characteristics, history often sheds light on future potential. On average, bull markets last more than five years. Being slightly over two years into this upturn indicates a strong likelihood of continuation in the coming year. Additionally, previous instances of 30% or greater gains for the Nasdaq typically see an additional average rise of 19% in subsequent years, suggesting a promising outlook for the market ahead.

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Growing Interest in Stock Splits

Investors are also showing renewed interest in stock splits. Typically, companies opt for splitting their shares when they demonstrate solid sales and earnings growth. A prime example is Broadcom (NASDAQ: AVGO), whose stock has surged 98% this year and a staggering 2,100% over the past decade (as of this writing). This impressive performance led to a 10-for-1 stock split in mid-July.

Despite its recent success, signs point to Broadcom’s growth continuing well into 2025 and beyond.

Image source: Getty Images.

Broadcom’s Diverse Portfolio

Broadcom offers a wide range of semiconductor, software, and security products catering to various sectors, including mobile, broadband, cable, and data centers. Many investors may underestimate the company’s significant influence. Management asserts that “99% of all internet traffic crosses through some type of Broadcom technology.”

The company’s expansive setup features “26 category-leading semiconductor and infrastructure software divisions.” These semiconductor offerings are vital for networking, server storage, broadband, wireless, and industrial industries. Concurrently, its infrastructure software supports mainframe, distributed computing, cybersecurity, storage area networking, and cloud infrastructure.

Broadcom’s broad reach provided it a strategic advantage when generative AI surged in popularity last year. Many of its solutions are essential for data centers, the epicenters for most AI processing.

The surge in AI adoption has triggered a rush to enhance data centers to manage AI needs. Nvidia CEO Jensen Huang forecasts that over $1 trillion will be spent on data center upgrades in the next five years, along with another $1 trillion to establish new data centers. Such developments present significant opportunities for Broadcom.

Furthermore, Broadcom’s acquisition of VMWare earlier this year earned recognition from Gartner‘s Magic Quadrant as a leader in software-defined wide area network (SD-WAN) for the seventh consecutive year, underscoring its crucial role in the tech landscape.

Impressive Earnings and Talent Forecasts

The financial results are eye-catching. In its fiscal fourth quarter (ended Nov. 3), Broadcom reported revenue of $14 billion, a remarkable 51% increase from the prior year. Adjusted earnings per share (EPS) rose 31% to $1.42. Management attributed this growth primarily to the increasing demand for AI technology, with AI networking revenue soaring 158% year over year. Sales of custom accelerators (XPUs) doubled, while connectivity product revenue quadrupled.

Looking ahead, Broadcom projects first-quarter revenue of $14.6 billion, slightly above Wall Street’s expectations of $14.47 billion. Management anticipates ongoing margin expansion, predicting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will rise to 66% of revenue, up from 65% in the previous quarter.

Projected growth looks promising. Management estimates that AI revenue could reach between $60 billion and $90 billion by fiscal 2027, compared to the $12.2 billion in AI revenue generated in fiscal 2024, indicating potential growth of 391% to 638% over the next three years. The addition of two new hyperscale customers not accounted for in this projection further suggests heightened growth potential.

Wall Street Sentiment

Wall Street analysts are optimistic about Broadcom’s future. The average price target stands at roughly $234 (as of this writing), indicating a potential upside of 6%. Among 43 analysts surveyed in December, 88% rated the stock as a buy or strong buy, with none recommending a sell.

Jefferies analyst Blayne Curtis has an even more bullish outlook. He recently raised his price target to $300, implying a potential upside of 36%. Curtis highlights the growing importance of application-specific integrated circuits (ASICs) in AI, emphasizing that Broadcom is “uniquely positioned with AI ASICs rapidly growing in complexity and volumes.”

Investment Considerations

Broadcom’s recent price surge has influenced its valuation, with the stock currently trading at about 35 times forward earnings compared to a multiple of 30 for the S&P 500. Although this reflects a premium valuation, it is important to consider its performance. Over the past five years, Broadcom has delivered gains of 592%, far exceeding the broader market index.

With this perspective in mind, it may be reasonable to conclude that Broadcom is a worthwhile investment.

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*Stock Advisor returns as of December 23, 2024

Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.

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