Broadcom’s (NASDAQ: AVGO) remarkable 125% surge from $110 levels in early 2024 has investors questioning whether the AI chipmaker can repeat its performance. What could potentially cause the stock to double to $500+ levels from this point in the coming years? The most compelling driver lies in Broadcom’s custom silicon business. AI-related semiconductors now comprise over 50% of Broadcom’s sales, representing a fundamental shift in the company’s revenue mix. The company’s management estimates the serviceable addressable market at $15-20 billion. The custom chip market shows explosive growth potential. The total market for custom chips could grow to about $55 billion by 2028, essentially more than tripling from current levels. This expansion reflects hyperscalers’ increasing preference for purpose-built silicon over general-purpose processors. Separately, if you’re looking for a steadier path to gains than investing in a single stock, explore the High Quality portfolio, which has outpaced the S&P and returned over 91% since inception. Also, see – AMZN Stock To $400?
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There are other factors at play as well.
- Strengthening Customer Partnerships
- Broadcom is forging strong, high-value partnerships with major hyperscalers, including a collaboration with OpenAI for chip development, working alongside TSMC.
- There are also reports of Broadcom collaborating with Apple on AI chip development.
- Broadcom is actively developing AI chips with three large cloud customers, which indicates diversified revenue streams beyond its current partnerships. Also, see – Broadcom’s Revenue Comparison
- Accelerating Inference Demand
- While initial AI investments focused on training chips, the demand for inference chips is now the primary growth driver.
- OpenAI’s rapid growth, with its annual recurring revenue crossing $10 billion (nearly doubling from $5.5 billion at the end of 2024), is generating massive demand for inference chips.
- As AI applications transition from development to deployment, inference workloads require specialized networking and processing capabilities, areas where Broadcom excels.
- Product Innovation
- Broadcom continues to advance its technological leadership. The company recently shipped its Tomahawk 6 networking chip, which offers double the performance of its predecessor, showcasing Broadcom’s sustained competitive advantage.
- Furthermore, Broadcom’s co-packaged silicon photonics technology strategically positions it to meet the demands of next-generation AI infrastructure.
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Path To 2x Growth
Broadcom’s strong earnings growth can support higher valuations. Broadcom’s revenue is expected to grow in the high teens average annual rate to over $100 billion by 2029. The company has high profitability with its adjusted net income margin of 50% in the last twelve months. This means that the impact on earnings will be more profound than on the top-line.
At its current levels of $265, AVGO stock is trading at 45 times its trailing twelve months adjusted earnings of $5.84 per share. Also, see – Broadcom’s Valuation Ratios. Sustaining this multiple could send the stock to around $500 in that time. A higher multiple would support an even larger gain. The existing customer relationships often involve multi-year commitments and significant switching costs, which provides Broadcom with revenue visibility and pricing power, potentially sustaining premium valuations. For this multiple to expand, Broadcom would need to demonstrate: sustained 40%+ annual revenue growth in AI segments, expand its market share in the custom silicon space, focus on further margin expansion from higher-value product mix, and win contracts with new customers.
Overall, Broadcom’s path to doubling hinges on capturing a big share of the expanding custom chip market while maintaining its technological edge in AI networking. With the custom chip market potentially reaching $55 billion by 2028 and Broadcom’s current leadership position, the company appears well-positioned for continued outperformance.
But There Are Risks
While Broadcom shows strong growth potential, several factors could limit its upside.
- Potential Headwinds
- A significant risk stems from its customer concentration, as reliance on a few large clients creates dependency.
- Increased competitive pressure from companies like Marvell, along with potential new market entrants, could also compress Broadcom’s margins.
- Furthermore, any slowdown in AI infrastructure spending would disproportionately impact Broadcom’s growth trajectory.
- Macroeconomic Vulnerability
- Broadcom’s stock has demonstrated lower resilience during adverse market conditions compared to the broader market.
- For instance, during the 2022 inflation shock, AVGO stock fell 37% while the S&P 500 declined 25%.
- Similarly, during the COVID-19 pandemic correction, AVGO experienced a 48% drop compared to the benchmark index’s 34% decline.
- This historical performance highlights the stock’s vulnerability to macroeconomic uncertainty.
Thus, investors eyeing Broadcom should weigh these risks carefully. At Trefis, we account for such risks in constructing the High Quality (HQ) Portfolio, which includes 30 stocks and has consistently outperformed the S&P 500 over the past four years. What’s behind that outperformance? HQ Portfolio constituents tend to deliver higher returns with lower volatility than the benchmark, as seen in HQ Portfolio performance metrics.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
