Could this Artificial Intelligence Corporation Emerge as the Optimal Choice for Stock Division Purchases in the Approaching 2025?
This year has been quite the rollercoaster for investors in Broadcom (AVGO, -1.59%). The stock has seen a significant increase in value, more than doubling over the past 12 months. The company chose to split its stock during the summer to lower the share price, but the excitement over recent earnings results propelled it close to $250.
The fluctuations in stock prices don't necessarily reflect the company's performance. However, Broadcom's recent moves in the artificial intelligence (AI) sector hint at the possibility of it becoming the next major player in the AI chip market, and potentially the best stock-split investment heading into the new year.
Broadcom's burgeoning role in AI processing.
Broadcom has a strong background in semiconductors for networking, switching, and other connectivity applications. This expertise has led to success in the AI chip segment, where Broadcom is gaining ground by developing custom chips, known as XPUs (extreme processing units), capable of collaborating to handle AI-specific tasks.
Until now, Nvidia has dominated the AI chip market. Its powerful GPUs (graphics processing units) have become the preferred hardware for providing the processing power required for training AI models. With an increasing number of companies applying AI to real-world applications, there's a need for AI chips for inference tasks.
In AI terms, inference involves translating AI's intelligence to new real-world situations and generating accurate results, all while ensuring efficiency so that it can be performed on a smartphone or other small computer.
While Nvidia does have chips suitable for inference tasks, companies might seek alternatives to relying on a single supplier for all their chips. The AI boom has already boosted Nvidia's profit margins significantly.
Is Broadcom preparing for a growth surge?
It's becoming increasingly clear that Broadcom is focusing on this opportunity, specifically in the inference chip sector.
Broadcom's fourth-quarter report for fiscal 2024 highlighted its strong AI momentum. Total AI revenue for the fiscal year saw a 220% increase, reaching $12.2 billion. Management discussed the future of Broadcom's AI XPUs on the company's earnings call, but did not specify the customers. They did mention, however, that Broadcom has three high-profile customers with multigeneration product roadmaps, aiming to add over a million XPU chips on a single cluster by 2027. Two additional large-scale AI customers are also in the early stages of developing custom AI XPU chips.
In monetary terms, management estimates that Broadcom's AI-related market opportunity could reach between $60 billion and $90 billion by 2027. They expect Broadcom to capture a significant share of that total. Moreover, reports suggest that Broadcom is collaborating with ChatGPT developer OpenAI and Apple on inference chips, which aligns with broader trends.
If these collaborations prove successful, Broadcom may have a more substantial presence in the AI chip market than anticipated, which would serve as a significant catalyst for the company. It's worth noting that Broadcom's AI revenue was only $12.2 billion in its recently concluded fiscal 2024.
The stock is yet to fully catch up to this opportunity.
Chasing hot stocks can sometimes be risky, and Broadcom, which has seen a 50% increase over the past month alone, is currently in the limelight.
However, this surge isn't solely due to hype. Analysts are revising their long-term earnings growth estimates for Broadcom as the AI opportunity becomes more evident. Despite the stock's impressive performance, Broadcom's forward P/E ratio of 40 offers a reasonable valuation for a company expected to grow earnings at over 21% per year over the next 3-5 years.
Broadcom's stock is now trading at a PEG ratio of 1.9, which suggests that its expected growth and valuation are beginning to balance out. I'm comfortable buying high-quality stocks when their PEG ratios are within the 2.0 to 2.5 range. Still, further gains could be on the horizon as Broadcom's two newer AI chip customers move into production phases. Additionally, Broadcom's software business has continued to grow due to its blockbuster VMware acquisition last year.
Broadcom's valuation remains reasonable, making it an attractive buy to consider heading into 2025 and holding through the upcoming AI ramp-up over the next few years.
In the realm of finance and investing, Broadcom's strong performance in the AI chip market is attracting interest from potential investors. Analysts are revising their long-term earnings growth estimates for Broadcom, considering the significant AI opportunity, despite its forward P/E ratio of 40.
Broadcom's AI-related market opportunity is projected to reach between $60 billion and $90 billion by 2027, with the company aiming to capture a substantial share of this market. As Broadcom collaborates with major players like OpenAI and Apple on inference chips, its presence in the AI chip market could potentially be larger than anticipated, serving as a significant catalyst for the company.
