Apple was the founding member of the exclusive $1 trillion club in 2018. Warren Buffett's Berkshire Hathaway and Taiwan Semi are the newest members, having joined in the last few months. And despite only joining in 2023, Nvidia has leapfrogged tech giants like Microsoft to become the second-most valuable company in the world, thanks to soaring demand for its artificial intelligence (AI) data center chips.
I predict one more company is about to join them. Broadcom(NASDAQ: AVGO) has a market capitalization of $840 billion as of this writing, following an incredible 527% gain in its stock over the last five years. Like Nvidia, Broadcom is experiencing incredible demand for its AI data center hardware, and that could be the company's ticket to the $1 trillion club in 2025.
Broadcom stock only needs to gain another 19% to get there, and with two full months remaining in 2024, I'm not discounting the possibility that it could cross the $1 trillion milestone before the new year. But here's why I think 2025 is a more realistic target.
An AI company in more ways than one
Broadcom has a history of innovation that spans decades. It pioneered everything from optical mouse sensors for computers to fiber optic transmitters for data communications. However, starting in 2016, it evolved into far more than a semiconductor and electronics company.
That was the year Broadcom merged with chip giant Avago Technologies. Since then, it has spent nearly $100 billion acquiring other companies, including semiconductor equipment supplier CA Technologies, cybersecurity giant Symantec, and cloud software provider VMware. Each of them contributes to Broadcom's growing portfolio of AI products and services.
On the hardware side, Broadcom is having incredible success supplying custom AI accelerators (a type of chip used for processing AI workloads) to hyperscale customers -- which typically includes Microsoft, Amazon, and Alphabet. During the recent fiscal 2024 third quarter (ended Aug. 4), Broadcom said sales of its AI accelerators surged by three and a half times compared to the year-ago period.
The company also supplies Ethernet switches for data centers, which regulate how quickly information travels between chips and devices. Many AI data centers cluster tens of thousands of graphics processing units (GPUs) or accelerators together. High-quality networking equipment ensures developers can build AI models at the fastest speed possible, which also keeps costs down.
Broadcom said sales of its Tomahawk 5 and Jericho3-AI Ethernet switches grew fourfold (year over year) during Q3. That isn't surprising given the strength of its accelerators business, and Nvidia's GPU business, for that matter. Tech giants are spending tens of billions of dollars building AI data centers right now, which is a powerful tailwind for Broadcom's networking equipment.
Image source: Getty Images.
On track for record revenue in 2024, with strong growth from AI
Broadcom generated $13.1 billion in total revenue across all of its businesses in Q3, which was a 47% increase from the year-ago period. Of that, $3.8 billion was attributed to the inclusion of VMware's revenue. Broadcom closed the acquisition of that company in 2023, and only started reporting its revenue on a consolidated basis this year, which is temporarily inflating its total revenue growth.
Broadcom said AI products and services contributed $3.1 billion to its overall revenue during the quarter, and that could be the fastest-growing part of the entire organization going forward. In the upcoming fourth quarter, Broadcom expects to deliver $3.5 billion in AI revenue. This will represent a sequential increase of over 10%, compared to forecasted sequential growth of just 6.8% for its total revenue overall (which is expected to come in at $14 billion).
Broadcom is on track to generate a record $51.5 billion in total revenue for fiscal 2024. The company originally expected AI to account for $11 billion of that figure, but the segment has been so strong that management recently increased its forecast to $12 billion.
Broadcom's (mathematical) path to the $1 trillion club
Broadcom isn't consistently profitable on a GAAP accounting basis, so we can't use the traditional price-to-earnings (P/E) ratio to value its stock. However, we can use the price-to-sales (P/S) ratio, which divides the company's market capitalization by its trailing 12-month revenue.
Based on that calculation, Broadcom's P/S ratio is currently 17.6. To be clear, that is not cheap -- it's close to double the stock's average P/S ratio of 8.9 over the last five years.
AVGO PS Ratio Chart
However, Broadcom's strong AI growth under the surface of its total revenue is enticing investors to pay a premium for its stock. As I mentioned, Broadcom only has to gain 19% from here to join the $1 trillion club, so if its P/S ratio remains constant, it simply has to grow its revenue by 19% in fiscal 2025 (which begins in December this year) to get there.
Wall Street expects Broadcom's revenue to grow by 17.5% in fiscal 2025, which is in the ballpark. However, since the company raised its fiscal 2024 AI revenue forecast by a whopping $1 billion last quarter alone, there is a very strong possibility that the Street's estimate for next year is low.
Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion building AI infrastructure over the next five years. If he's right, I think there is a good chance Broadcom will blow away all expectations in 2025.
The key risk in my prediction is that Broadcom's P/S ratio could shrink because investors become averse to stocks with high valuations, which could add years to its journey toward the $1 trillion club. That's something to keep in mind before buying in. But as long as investors maintain a long-term horizon of five years or more, they still have the potential to do very well in this stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. 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.
