With some solid AI-related growth opportunities, the chipmaker could join the trillion-dollar market cap club in the future.
Artificial intelligence (AI) has been a steady growth driver for many semiconductor companies, including Broadcom (AVGO 1.73%), as the chipmaker benefits from the growing adoption of the technology in a variety of applications, from data centers to enterprise networks to smartphones.
Broadcom shares have been trending lower recently, dropping 22% from their 52-week high hit on June 18, but a closer look at the company's prospects and growth potential suggests this decline may be temporary. The semiconductor giant is currently valued at $661 billion and has a good chance of joining the $1 trillion market cap club in the future.
In this article, we take a closer look at why Broadcom is on track to achieve that milestone.
Broadcom is a major player in the AI chip market
While Nvidia is a dominant force in the market for graphics processing units (GPUs) in AI data centers, Broadcom has established a strong position in another niche of the AI chip market: JPMorgan notes that Broadcom is a leader in application-specific integrated circuits (ASICs), which are custom chips designed to perform specific tasks.
According to Harlan Sah of JP Morgan, Broadcom has 55% to 60% of this market. The chipmaker has built a strong customer base for its custom AI chips, including Alphabet and Meta Platforms. Even better, Broadcom recently landed its third customer for its custom AI processors, which is why the company is raising its revenue forecast from AI chips.
AI chips are expected to account for 15% of Broadcom's semiconductor sales in fiscal 2023, rising to 35% in fiscal 2024. The chipmaker expects to generate more than $10 billion in revenue in fiscal 2024 from sales of custom AI chips, meaning that nearly 20% of its projected revenue of $51 billion in fiscal 2024 will come from AI.
But JPMorgan sees even more revenue potential for Broadcom from custom AI chips, estimating the revenue opportunity to be in the range of $20 billion to $30 billion, and the investment bank adds that over the long term, Broadcom's custom AI chip opportunity could grow at a compound annual growth rate of more than 20%.
This isn't surprising, as tech giants are looking to reduce their reliance on Nvidia's pricey GPUs so they can train and deploy AI models and applications more cost-effectively. Recent rumors suggest that OpenAI, the developer of ChatGPT, may be in talks with Broadcom to develop custom AI chips.
But custom processors aren't Broadcom's only big opportunity in the AI market. The chipmaker's networking business is also getting a big boost, as AI data centers need high-speed connections to move large amounts of data quickly. During a June earnings call, Broadcom CEO Hock Tan noted that “as AI data center clusters are being deployed, our revenue mix is shifting toward an increasing share of networking.”
The company's Ethernet switch shipments doubled year over year, and with AI-specific network traffic predicted to grow at a staggering 120% annual growth rate through 2030, according to market research firm Omdia, it's no surprise that Broadcom's networking business is poised to thrive in the long term.
As a result, AI data centers will spend a lot more on switches to ensure faster connections: Market research firm Dell'Oro predicts that AI will double the data center switch market to $80 billion over the next five years, meaning Broadcom may have a bigger opportunity in the data center switch market thanks to AI.
Strong earnings growth could propel market cap to $1 trillion
Broadcom is expected to end the current fiscal year with earnings of $4.75 per share, and as the chart below shows, the company's profits are likely to continue growing at a healthy pace over the next few years.
AVGO's current fiscal year EPS forecast data (via YCharts)
Analysts expect Broadcom to post annual earnings growth of 18% over the next five years. The company's expected earnings of $4.75 a share this fiscal year could jump to $10.87 a share five years from now. The company's shares currently trade at 24 times forward earnings, a discount to the Nasdaq-100 Index's 28 times forward earnings (which we use as a proxy for tech stocks).
Assuming it continues to trade at 20 times projected earnings five years from now, the stock could jump to $217 based on projected earnings. That would be a 53% increase from current levels and just enough to catapult this AI stock into the trillion-dollar market cap club based on its current market cap of $661 billion.
Suzanne Frey, an executive at Alphabet, serves on The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet, JPMorgan Chase, Meta Platforms, and NVIDIA. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
