Where Will Broadcom Stock Be in 3 Years?

Broadcom (AVGO) has proven to be an exceptional investment over the past three years, with its shares surging an impressive 240%. This remarkable growth is significantly higher than the 27% gains recorded by the PHLX Semiconductor Sector index during the same period.

As investors look to the future, many may be questioning whether this semiconductor giant can maintain its upward trajectory over the next three years and if it remains a worthwhile investment after such substantial gains. This article will discuss Broadcom's potential growth drivers for the upcoming years, assess whether this stock can deliver more value, and review its current valuation to determine its attractiveness for those considering adding a semiconductor stock to their portfolios.

A Major Catalyst for Future Growth

Recently, Broadcom released its financial results for the fourth quarter of fiscal 2024 (ending November 3). The company reported annual revenue growth of 44%, reaching a record $51.6 billion. Excluding the effects of its VMware acquisition from November last year, Broadcom still enjoyed an organic revenue increase of 9% year-over-year.

In terms of non-GAAP (adjusted) earnings, Broadcom registered $4.87 per share, a 15% improvement compared to the previous year. What's encouraging is that its guidance for the first quarter of fiscal 2025 indicates a faster growth pace for the company, projecting $14.6 billion in revenue for the current quarter, which would represent a 22% increase compared to the same quarter last year.

While Broadcom has not provided full-year guidance, analysts predict that revenues will increase by nearly 19% in the current fiscal year to reach around $61.1 billion. In the following fiscal years, continued growth of about 15% is also anticipated.

The revenue estimates for Broadcom have seen significant upward revisions for all three fiscal years, largely driven by the rapid demand for the company’s artificial intelligence (AI) chips. These chips are increasingly being utilized in data centers for AI model training and inference, as well as enhancing server connectivity for managing AI workloads.

Notably, Broadcom's AI revenue surged by an extraordinary 220% in fiscal 2024, totaling $12.2 billion. The company expects this upward trend to continue, forecasting a year-over-year growth of 65% in AI chip sales for the current quarter, anticipating $3.8 billion in revenue.

This growth is further bolstered by the addition of two new hyperscale customers selecting Broadcom's custom AI processors, which could help reduce reliance on costly graphics cards from Nvidia.

Management indicated that the addressable market for their custom AI accelerators and networking chips could range from $60 billion to $90 billion by fiscal 2027. If we take the midpoint estimate of $75 billion, and consider a scenario where Broadcom secures a 50% share of the custom chip market, their AI revenue could reach $37.5 billion by fiscal 2027.

In a more optimistic scenario, if Broadcom retains its share of the custom chip market at 60%, and the market expands to $90 billion, its AI revenue could potentially exceed $50 billion. This would represent a drastic increase in overall revenue, pushing it well above the expectations shown in earlier revenue estimates.

Is Broadcom Stock Still a Smart Buy?

One of the appealing aspects of Broadcom is that it currently trades at a reasonable 35 times its forward earnings. This is particularly attractive compared to the Nasdaq-100 index, which trades at a similar price-to-earnings ratio.

Additionally, Broadcom has a price/earnings-to-growth (PEG) ratio of just 0.63, based on projections of its five-year earnings growth. A PEG ratio below 1 indicates that a stock is considered undervalued relative to its potential earnings growth, making Broadcom an attractive investment option.

For investors interested in adding a competitively-valued AI stock capable of strong future growth to their portfolios, Broadcom presents a compelling case. The company appears well-positioned to maintain its impressive rally and continue generating returns for its shareholders.

Broadcom, Stocks, Investment