This category-leading semiconductor and software company is generating robust growth driven by the next generation of AI.
Industrial and oil companies once represented the pinnacle of business valuations, but no more. For instance, in 2004, General Electric and ExxonMobile were the largest companies in the world when measured by market cap, worth $319 billion and $283 billion, respectively.
However, over the past 20 years, there’s been a changing of the guard, and the charts are dominated by the world’s most well-known technology firms. The battle among the top three continues to rage, as Apple, Nvidia, and Microsoft are all worth more than $3 trillion, though the top spot has changed hands several times this year. There are three other tech-centric companies with memberships in the $1 trillion club, namely Alphabet, Amazon, and Meta Platforms, with valuations of $2 trillion, $1.9 trillion, and $1.5 trillion, respectively.
With a market cap of roughly $818 billion (as of this writing), Broadcom (AVGO -2.27%) rounds out the top 10 and seems destined to join this exclusive fraternity. The company holds a unique position in the artificial intelligence (AI) infrastructure, and the accelerating adoption of this breakthrough technology could help Broadcom secure its membership in the $1 trillion club sooner than you might think.
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A side of chips
Broadcom is responsible for a wide range of semiconductor, software, and security solutions that extend into every aspect of the cable, broadband, mobile, and data center arenas. In fact, management estimates that “99% of all internet traffic crosses through some type of Broadcom technology.” It’s for this reason the company has an important role in the rapid adoption of AI, as its vast collection of technologies forms a foundation necessary for generative AI, which operates primarily in data centers and in the cloud.
There’s also a significant opportunity at hand from Broadcom’s acquisition of VMWare late last year. Management has been working overtime to convert VMWare’s offerings to a subscription licensing model, which will ultimately increase recurring revenue. Broadcom will also benefit from cross-selling these products to its existing customers, a process that’s already on the fast track.
The results show that business is booming. In Broadcom’s fiscal third quarter (ended Aug. 4), revenue jumped 47% year over year to $13.1 billion, while its adjusted earnings per share (EPS) of $1.24 climbed 18%. Management is expecting its robust growth to continue, raising its full-year revenue forecast to $51.5 billion, which would represent growth of 44%.
The company’s consistently strong results and soaring stock price convinced Broadcom’s management to pursue a 10-for-1 stock split, which was completed in mid-July.
The path to $1 trillion
The widespread reach of Broadcom’s chips and accessories — which are key components in the operation of data centers — gives the company a leg-up in the AI revolution.
According to Wall Street estimates, Broadcom is expected to generate revenue of $51.61 billion in 2024, giving it a forward price-to-sales (P/S) ratio of nearly 16. If the stock’s P/S remains constant, Broadcom will need to generate sales of roughly $63 billion annually to support a $1 trillion market cap.
Analysts’ consensus estimates are guiding for revenue growth of 44% in 2024 and 14% in 2025. If the company hits those targets, it could achieve a $1 trillion market cap as early as 2026. Furthermore, the rapid and growing adoption of AI has been increasing growth estimates, so these forecasts could end up being conservative.
The evidence suggests Broadcom could join the ranks of trillionaires sooner than later. Management noted that infrastructure software revenue soared 200% in the third quarter, and the company expects AI-related revenue to grow to over $12 billion this year, which would represent 23% of its forecasted revenue for the fiscal year.
It’s still too early to tell just how big the market for generative AI could become, but the estimates continue to ratchet higher. The economic value of generative AI is expected to be worth between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. That number doubles if it includes the revenue resulting from embedded software.
Broadcom’s strong results and excitement related to the stock split have fueled a surge in the stock price, as well as a commensurate increase in its valuation. The stock is selling for 36 times forward earnings, a premium compared to a multiple of 28 for the S&P 500.
However, Broadcom’s stock has gained 10,720% since 2009, more than 22 times the 471% return for the S&P, which illustrates why the premium is justified.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
