Artificial intelligence (AI) has turned out to be a solid growth driver for many semiconductor companies, and Broadcom (NASDAQ: AVGO) is one of them, as the chipmaker is gaining from the growing adoption of this technology across multiple applications ranging from data centers to enterprise networking to smartphones.
Though Broadcom stock has been in pullback mode of late, dropping 22% from the 52-week high it hit on June 18, a closer look at the company's prospects and its growth potential suggests that the downturn could be temporary. The chip giant currently has a market cap of $661 billion, and there is a good chance that it could join the $1 trillion market cap club in the future.
In this article, we will take a closer look at the reasons why Broadcom seems to be on its way to achieving that milestone.
Broadcom is a key player in the AI chip market
Nvidia has become the dominant force in the market for AI data center graphics processing units (GPUs), but Broadcom has established a solid position for itself in a different niche of the AI chip market. JPMorgan points out that Broadcom is the leader in application-specific integrated circuits (ASICs), which are custom chips designed for performing specific tasks.
Broadcom reportedly commands between 55% to 60% of this market, according to Harlan Sur of JPMorgan. The chipmaker has built a solid clientele for its custom AI chips, which include the likes of Alphabet and Meta Platforms . Even better, Broadcom recently added a third customer for its custom AI processors, which explains why the company has increased its revenue expectations from AI chips.
AI chips accounted for 15% of Broadcom's semiconductor revenue in fiscal 2023, a figure that's expected to grow to 35% in fiscal 2024. The chipmaker expects to generate more than $10 billion in revenue in fiscal 2024 from sales of its custom AI chips, which means that almost 20% of its forecast fiscal 2024 revenue of $51 billion will be from AI.
JPMorgan, however, sees more revenue upside for Broadcom in custom AI chips with an estimated revenue opportunity in the range of $20 billion to $30 billion. What's more, the investment bank adds that Broadcom's custom AI chip opportunity could increase at a compound annual growth rate of over 20% in the long run.
That won't be surprising as tech giants have been looking to reduce their reliance on Nvidia's expensive GPUs so that they can train and deploy AI models and applications in a more cost-effective manner. Recent chatter indicates that ChatGPT developer OpenAI could be in negotiations with Broadcom for the development of custom AI chips.
However, custom processors aren't the only big opportunity for Broadcom in the AI market. The chipmaker's networking business is also getting a big boost as AI data centers require high-speed connectivity to transfer huge amounts of data rapidly. On its June earnings conference call , Broadcom CEO Hock Tan pointed out, "As AI data center clusters continue to deploy, our revenue mix has been shifting toward an increasing proportion of networking."
Shipments of the company's ethernet switches doubled on a year-over-year basis. It won't be surprising to see Broadcom's networking business getting better in the long run as, according to market research firm Omdia, AI-specific network traffic is forecast to grow at a whopping annual rate of 120% through 2030.
As a result, AI data centers are likely to spend more money on switches to ensure faster connectivity. Market research firm Dell'Oro expects AI to double the market for data center switches to $80 billion over the next five years. So, Broadcom could be sitting on a bigger opportunity in the data center switching market thanks to AI.
Strong earnings growth could help it reach a $1 trillion market cap
Broadcom is expected to finish the current fiscal year with $4.75 per share in earnings, and as the chart below shows us, its bottom line could keep growing at a healthy pace over the next couple of years.
AVGO EPS Estimates for Current Fiscal Year data by YCharts
Analysts are expecting Broadcom to clock annual earnings growth of 18% over the next five years. Based on the company's estimated earnings of $4.75 per share for the current year, its bottom line could jump to $10.87 per share after five years. The stock is currently trading at 24 times forward earnings , which is a discount to the Nasdaq-100 index's forward earnings multiple of 28 (using the index as a proxy for tech stocks).
Assuming it continues to trade at even 20 times forward earnings after five years, its stock price could jump to $217 based on the projected earnings estimate. That would be a 53% increase from current levels, which would be just about enough to send this AI stock into the trillion-dollar market cap club based on its current valuation of $661 billion.
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. 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 has positions in and recommends Alphabet, JPMorgan Chase, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy .
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