As the artificial intelligence (AI) and accelerated computing data center bull market has heated up, realization settled in that this is more than hype. Nvidia (NASDAQ: NVDA) has been the standout winner so far: Shares are up an incredible 1,850% in the last trailing five-year stretch alone, clobbering average market returns.
But Nvidia isn’t the only market-beating semiconductor stock. Broadcom (NASDAQ: AVGO) is also doing more than just fine with a 390% return in just five years. As data center infrastructure upgrades rise, favoring more AI and accelerated computing, Broadcom stands to gain quite a lot. Here’s why.
Broadcom has layers of AI products
Just a couple of months ago, Broadcom reported soaring growth for its Networking semiconductor business unit. Broadcom reported 46% year-over-year growth for this segment and expects 35% full-year growth in Networking because its big data center customers (like Alphabet) rely more heavily on Broadcom for custom silicon AI services.
For the record, as of the last quarter (Q1 fiscal 2024), nearly half of Broadcom’s semiconductor revenue came from the company’s Networking segment. Given that other areas of the business (smartphone, telecom, and industrial semiconductors) could falter a bit in 2024, Broadcom expects to exit this year as a leader in data center AI semiconductor sales. Overall, the chip segment is expected to tick up by a mid- to high-single-digit percentage compared to 2023.
At the heart of Broadcom’s success in AI are its Jericho3-AI Fabric chip and the Tomahawk 5 Ethernet switch chip. Both of these devices help power the servers that coordinate the massive amounts of data flowing through a data center. These devices are helping Broadcom customers string together tens of thousands of GPU chips (like the ones Nvidia develops) for AI training. And as AI models get bigger and more customers begin using them after they’re trained, Broadcom is working toward stringing together 1 million GPUs to build massive supercomputers of the future.
But these days, Broadcom is more than just a chip-and-computing-hardware company. After the mega-acquisition of cloud computing enterprise software company VMware late in 2023, it now offers the management tools its data center customers need once all those new chips are installed. Included in the portfolio of enterprise software is the Private AI Foundation. Similar to VMware’s Cloud Foundation, Private AI Foundation works with Nvidia and others to patch together all the hardware and software tools an organization needs to operate its newfound AI capabilities.
This makes Broadcom a superb bet on not just AI semiconductors but also AI software.
The Broadcom business advantage
Longtime Broadcom shareholders know this is never going to be the fastest-growing business. That’s due largely to its highly diversified nature. But what it lacks in all-out growth Broadcom makes up for in profitability. In fact, that’s CEO Hock Tan’s management hallmark: acquiring complementary businesses and then giving them the private equity treatment by whittling the acquired entity down to its most profitable core operation.
This is what Broadcom is in the midst of doing with VMware — breaking off smaller parts of the business and selling them or refocusing attention on the biggest customers. It’s controversial, but it actually seems to have shifted the previously stagnant VMware operation into growth mode again. Tan and the top team reported an expectation for VMware revenue to grow by double-digit percentages in each subsequent quarter through the rest of this year.
A couple of months ago, I was leery of calling Broadcom a top semiconductor stock buy. But after seeing some big tech earnings results (from Meta, Google, and Amazon, for example), with expectations for big increases in data center spending this year and beyond, I’m changing my mind.
The stock still trades for about 31 times trailing-12-month free cash flow, just as it did after the last earnings update. But with a flood of new data center and AI spending likely in the next couple of years, Broadcom could be a massive winner on both the chip and software fronts. So today’s stock price could still be a long-term bargain for this proven market beater. I plan on adding a bit more to my Broadcom position.
Should you invest $1,000 in Broadcom right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Nicholas Rossolillo and his clients have positions in Alphabet, Amazon, Broadcom, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
1 Stock (Not Nvidia) Could Be a Massive Winner From Data Center AI was originally published by The Motley Fool
Source: finance.yahoo.com