Investing in semiconductor stocks has generally been a great move in recent years. And Broadcom (NASDAQ: AVGO) has been no exception to that. In five years, it has accumulated incredible gains for investors. Not only has it appreciated in value over that time, but the stock has also grown its dividend at a fairly high rate, making it an attractive investment option for both growth and dividend investors.
But can the stock continue building off these gains and continue to be a market-beating investment to hang on to for the foreseeable future? Let's take a look at the company's financials, fundamentals, and valuation to help answer that question.
Will artificial intelligence lift the stock to new heights?
A big reason to be bullish on Broadcom's future is the role it may play in artificial intelligence (AI). The company designs and develops semiconductors and infrastructure software solutions. It offers enterprise automation services, which help companies manage workloads across complex platforms and systems, providing them with "a single control point for all automation."
Broadcom says it has been experiencing some strong demand due to AI. In its most recent quarterly results, which ended on May 5, it says that revenue coming from its AI products reached a record $3.1 billion. Its total consolidated revenue of $12.5 billion was up 43% year over year. A big part of its recent growth, however, is due to its mammoth $69 billion acquisition of cloud computing business VMWare, which it completed in November of last year.
As a result of the strong results, Broadcom raised its guidance for the year, now projecting its consolidated revenue to come in at $51 billion -- up from an earlier guidance of $50 billion. In its most recent fiscal year, which ended on Oct. 29, 2023, Broadcom's sales came in at $35.8 billion.
The company has gotten bigger with the acquisition of VMWare, and with demand for AI products giving it another boost, Broadcom does have a lot of room for its sales and profits to rise in the years ahead.
Strong margins could make the stock look cheaper
Broadcom's stock trades at a hefty 59 times its trailing earnings , which could dissuade some investors from investing in it. However, that multiple could come down quickly as the business generates excellent margins. In the trailing 12 months, Broadcom's net income totaled $10.3 billion on revenue, totaling $42.6 billion, for a profit margin of 24%.
During that time frame, the company also generated free cash flow totaling $18.5 billion. The company pays a dividend and has been able to grow it over the years thanks to its strong free cash flow. Over the past four quarters, it has spent $8.7 billion on its dividend, leaving plenty of room for Broadcom to still invest in its operations and repurchase shares. With deep pockets, there's reason to be optimistic that Broadcom can take advantage of opportunities that arise in AI in the future.
Should you buy Broadcom stock?
Broadcom's returns have been exceptional over the past five years, totaling 400% and rising to 500% when including its dividend payments. Investors have done well by owning the stock. AI, however, could ensure that it continues to be a good buy over the next five years and beyond.
The big drawback for the tech stock today is its high valuation. But with some attractive growth opportunities in AI and high margins, its bottom line should rise significantly over the years, which can make it look like a cheap buy in the future.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0