the Nasdaq Composite It repeatedly reached new heights in 2024, setting more than 110 all-time highs. A series of encouraging developments have fueled its record. Accelerated adoption of Artificial Intelligence (AI) This was the initial catalyst for the recovery, but investor sentiment was boosted by falling inflation, recent interest rate cuts, and the US election results. The tech-focused index jumped 43% last year and is up nearly 30% so far in 2024 (as of this writing). Students of history will note that the rise is likely to continue until 2025.
Stock charts reveal that the current bull market began in October 2022. While every bull is different, history can provide context. Bull markets have historically lasted more than five years on average. It’s been just over two years since the current tour, suggesting it will likely continue into next year. Moreover, in the years following gains of 30% or more, the Nasdaq rose an additional 19% on average, suggesting that next year could be a good year for the market.
Investors have also embraced the stock split renaissance. This prompts them to examine companies that have split their stock, as this is usually the result of a well-managed company with strong growth in sales and profits. This is the case with Broadcom(NASDAQ:AFGO). The stock has gained 98% so far this year and 2,100% over the past decade (as of this writing). This led to a 10-for-1 stock splitwhich was completed in mid-July.
However, despite its recent rally, there is reason to believe Broadcom’s impressive run will continue in 2025 and beyond. Read on to find out why.
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Broadcom provides a broad range of semiconductor, software and security products that power the mobile, broadband, cable and data center industries, yet many investors continue to underestimate its reach. Management estimates that “99% of all Internet traffic passes through some type of Broadcom technology.”
This is just the beginning. Broadcom consists of “26 leading semiconductor software and infrastructure divisions,” according to the company. Its semiconductor solutions are critical components in networking, server storage, broadband, wireless, and industrial fields. Meanwhile, infrastructure software serves the mainframe, distributed, cybersecurity, storage area networks, and cloud infrastructure spaces.
Broadcom’s massive reach gave the company a strategic advantage when generative AI took off early last year. Many of its products are essential components in data centers, where most AI processing takes place.
One consequence of the rapid adoption of AI has been a scramble to upgrade data centers to handle the rigors of AI. Nvidia CEO Jensen Huang suggests there will be more than $1 trillion in data center upgrades over the next five years, with another $1 trillion spent to bring new data centers online. This represents a huge opportunity for Broadcom.
Earlier this year, VMWare, which was recently acquired by Broadcom, was recognized GartnerMagic Quadrant has named the company a leader in Software Defined Wide Area Networks (SD-WAN) for the seventh year in a row, attesting to its important position within the industry.
The results are convincing. For its fiscal fourth quarter (ending November 3), Broadcom generated revenue of $14 billion, which jumped 51% year over year. Adjusted earnings per share (EPS) of $1.42 increased 31%. Management was clear that growing demand for AI was fueling the results. AI networking revenues rose 158% year-over-year, while sales of custom accelerators (XPUs) doubled, and revenues from connectivity products rose four-fold.
For the upcoming first quarter, Broadcom expects revenue of $14.6 billion, beating Wall Street expectations of $14.47 billion. Management is also guiding continued margin expansion, which will lift adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to 66% of revenue, from 65% in the fourth quarter.
Looking to the future suggests that its growth is about to accelerate. Management expects AI revenue to be between $60 billion and $90 billion by fiscal year 2027. Compared to the $12.2 billion in AI revenue it generated in fiscal year 2024, this indicates growth between 391% and 638% over the next three years. . The company also announced that it has added two new high-volume customers — which were not included in its forecast — suggesting its growth could be more robust.
Wall Street is equally bullish. The average analyst price target is around $234 (as of this writing), which represents a potential upside of 6%. Additionally, of the 43 analysts offering an opinion in December, 88% rated the stock a buy or strong buy, and none recommended a sell.
However, Jefferies analyst Blaine Curtis is more optimistic than his colleagues on Wall Street. Just this week, he increased his price target to $300, representing a potential upside for investors of 36%. He is particularly excited about the opportunity involving application-specific integrated circuits (ASICs), which he believes will play an increasing role in artificial intelligence. He goes on to point out that Broadcom is “uniquely positioned as AI ASICs are rapidly growing in complexity and volumes.”
One consequence of the recent price rise is Broadcom’s valuation. The stock currently trades at about 35 times forward earnings, compared to a multiple of 30 per share Standard & Poor’s 500. While this is an excellent assessment, it should not be viewed in a vacuum. Broadcom has outperformed the broader market by a wide margin over the past five years, gaining 592%, nearly seven times the return of the broader index.
When viewed through that lens, I would argue that Broadcom is a buy.
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Danny Vina He has positions at Nvidia. The Motley Fool has positions on and recommends Nvidia. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has Disclosure policy.
