Each of the six publicly traded companies with a market capitalization of more than $1 trillion has played an important role in the advancement and development of artificial intelligence (AI). Four of these companies have split their stock in the past five years.
It may not be long before AI-driven stock splits are added to the stock market. broadcom (NASDAQ:AVGO) has emerged as a leading supplier of AI data center chip designs, complementing other semiconductor design and enterprise software businesses.
As of this writing, Broadcom’s market cap is around $850 billion and would need to increase by 18% to reach the $1 trillion milestone. Here’s why it always gets there.
Diversified semiconductor and software giant
Broadcom’s roots lie in semiconductor design and we have developed a strong portfolio of intellectual property to help power the AI arms race among major tech companies.
Broadcom networking chips are essential infrastructure for AI data centers. meanwhile Nvidiagraphics processing units (GPUs) get all the headlines, but it’s Broadcom’s chips that allow companies to get the most out of the billions of dollars they spend on them. Broadcom’s networking chips enable data to move quickly and efficiently between servers, increasing data center efficiency. No other company in this space can match Broadcom’s technology, and few customers would risk switching to a competitor due to the potential impact of using an inferior chip design and other switching costs.
Broadcom is also growing its custom chip design business, driven by investments in AI. broadcom design alphabettensor processing unit (TPU), apple Used to train large-scale language models (LLMs) in Apple Intelligence. It’s also behind Meta’s MTIA chip, which helps train and run Meta’s Llama models. OpenAI, a leader in generative AI, is also reportedly working with Broadcom on its own custom chip designs.
But Broadcom is more than just an AI chip maker. It holds a dominant position in wireless phone chips that improve 5G reception while extending battery life. It also makes WiFi and Bluetooth chips. Its chips are in Apple’s iPhone and many other high-end smartphones.
Broadcom has also made strategic acquisitions of enterprise software providers such as Symantec and VMWare in recent years. The company has a land development and expansion strategy focused on selling multiple software solutions to a small group of large enterprise customers. This provides a very stable recurring revenue stream that continues to grow.
Powering the future of artificial intelligence
Broadcom’s networking chips are already essential infrastructure for AI. Over the next few years, more and more major technology companies will rely on the company’s custom AI accelerators. Google and Meta have already spent heavily on custom silicon designed by Broadcom.
As AI development matures, we expect investors to focus more on custom chip designs like those from Google and Meta. This is because these chips are cheaper than general-purpose GPUs and use less energy for the same tasks. As a result, I expect the proportion of silicon in AI data centers to increase.
Broadcom’s AI chip business is not yet a part of its business, but it is growing very quickly. In the third quarter, Ethernet switching chip sales increased more than 4x year over year, and AI accelerator sales increased 3.5x year over year. Both should continue to drive Broadcom’s strong performance going forward.
The road to $1 trillion
Broadcom stock currently trades at about 29.5 times estimated 2025 earnings.
Broadcom’s results will improve next year as it cuts excess operating expenses related to its acquisition of VMWare in late 2023. These reductions should significantly expand operating profit margins. Even better, the long-term potential for operating leverage remains high even as the company’s AI chip business expands and it builds a recurring revenue enterprise software business. Over time, Broadcom’s profit growth should outpace sales growth.
AI chips could drive very significant revenue growth in the coming years. Also, improved operating leverage should generate the earnings growth needed to justify the price-to-earnings ratio.
To reach a $1 trillion valuation, Broadcom stock would need to reach around $214. Based on current analyst forecasts, the company’s valuation at the end of next year will be roughly the same as its forward P/E ratio of 29 times. If Broadcom outperforms expectations, it could reach the $1 trillion milestone even sooner.
Based on the current price and current outlook for the business, this stock appears to be trading at fair value and could be worth having in your portfolio.
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Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Adam Levy has held positions at Alphabet, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
1 Artificial Intelligence (AI) Stock Split Joins Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta in $1 Trillion Club
