As of Friday, December 13, the United States had seven tech companies each valued at over $1 trillion:
- Apple: $3.7 trillion
- Nvidia: $3.3 trillion
- Microsoft: $3.3 trillion
- Amazon: $2.4 trillion
- Alphabet: $2.3 trillion
- Meta Platforms: $1.5 trillion
- Tesla: $1.4 trillion
Recently, Broadcom became the eighth member of this exclusive group. After releasing its financial results for fiscal 2024, which ended on November 3, Broadcom’s stock jumped by 24% last Friday, pushing its valuation over $1 trillion.
Broadcom’s impressive growth was largely driven by its booming artificial intelligence (AI) revenue, thanks to its custom chips and networking equipment for data centers. The company has also shared an optimistic forecast for its AI revenue, indicating significant growth potential.
Before considering investing in Broadcom, it’s important to understand the company’s current high valuation. Here’s what you need to know:
Broadcom’s Emerging Role in AI Hardware
Initially, Broadcom focused on supplying semiconductor and electronic components for various computing applications. However, in 2016, it merged with Avago Technologies and later spent around $100 billion acquiring companies like CA Technologies, Symantec, and VMware. These acquisitions helped diversify Broadcom’s business and contributed to its growth into a $1 trillion company.
Today, due to the increased spending on AI infrastructure by major tech companies, Broadcom’s semiconductor and networking segments have gained significant attention. The company produces custom AI accelerators for three major clients, often referred to as hyperscalers, which likely include Microsoft, Amazon, Alphabet, and Oracle. In the fourth quarter of fiscal 2024, Broadcom doubled its shipments of AI accelerators compared to the previous year.
This is significant because Nvidia’s GPUs are currently the most popular chips in the AI sector. While these major companies are Nvidia customers, Broadcom enables them to design their own chips, catering to their specific needs and potentially reducing costs, as Nvidia’s hardware is expensive.
Additionally, Broadcom’s AI connectivity revenue increased fourfold due to strong sales of its Tomahawk and Jericho data center switches. These devices help manage data flow between chips and devices, allowing for faster processing and cost savings for AI developers who use numerous chips for model training.
Image source: Getty Images.
AI Revenue Soars in Fiscal 2024
Broadcom achieved a record $51.5 billion in total revenue for fiscal 2024, marking a 44% increase from the previous year. Much of this growth resulted from the inclusion of VMware’s revenue, following its acquisition in 2023, rather than organic growth.
Despite this, Broadcom impressed investors with its AI revenue, which skyrocketed by 220% to $12.2 billion in fiscal 2024, mainly from AI accelerators and networking equipment sales. Broadcom anticipates maintaining this growth momentum into fiscal 2025.
The company’s overall revenue growth came with increased costs, partly due to acquisitions like VMware. For instance, research and development expenses rose by 78% year over year to $9.3 billion, the largest portion of Broadcom’s $19 billion in total operating expenses for fiscal 2024.
As a result, Broadcom’s net income for fiscal 2024 was $5.9 billion, a 58% decrease from fiscal 2023. This impacts the valuation of Broadcom stock for investors using GAAP earnings as a measure.
On a non-GAAP basis, which excludes one-time acquisition expenses and non-cash costs like stock-based compensation, Broadcom’s net income was $23.7 billion, a 28% increase from fiscal 2023. This provides a clearer view of Broadcom’s business trajectory.
Broadcom’s Stock Valuation
Broadcom’s GAAP earnings per share (EPS) for fiscal 2024 was $1.23, resulting in a price-to-earnings (P/E) ratio of 183, which is high compared to the Nasdaq-100 technology index’s P/E ratio of 35.
Using its non-GAAP EPS of $4.96, the P/E ratio is 45, which is better but still high compared to the broader tech sector. Additionally, many investors don’t consider non-GAAP EPS as a true measure of profitability.
Instead of using the traditional P/E ratio, Broadcom could be evaluated using the price-to-sales (P/S) ratio, which is 20.7, nearly triple its 10-year average of 7.4:
AVGO PS Ratio data by YCharts
In summary, Broadcom’s stock appears expensive based on its P/E and P/S ratios. Therefore, it might not be ideal for short-term investors looking at a 12-month horizon.
However, long-term investors might find it appealing, as Broadcom aims to increase its AI revenue to between $60 billion and $90 billion annually by fiscal 2027, driven by high demand for accelerators and networking equipment.
Given its current valuation, potential investors might want to wait for a price drop before buying Broadcom stock, but it remains a high-quality option for those interested in the AI market.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
