The company combines a strong portfolio of both chips and software, similar to what Nvidia is building.
As the artificial intelligence (AI) and accelerated computing data center bull market heats up, the realization that this is more than just hype has taken hold. Nvidia (NASDAQ:NVDA) The stock price has risen an incredible 1,850% in the past five years alone, outpacing the average market return.
But Nvidia isn't the only semiconductor stock to beat the market. broadcom (AVGO 2.08%) And it's done even more, with a 390% return in just five years. As data center infrastructure upgrades increase and AI and computing become faster, Broadcom stands to benefit handsomely. Here's why:
Broadcom has layered AI products
Just a few months ago, Broadcom reported rapid growth in its network semiconductor business unit. Broadcom reported 46% year-over-year growth in this segment, with large data center customers (e.g. alphabet) For custom silicon AI services, we rely heavily on Broadcom.
For comparison, as of last quarter (Q1 2024), nearly half of Broadcom's semiconductor revenue came from its networking division. We expect Broadcom to end its position as the leader in data center AI semiconductor sales this year, given that other areas of the business (smartphones, communications, industrial semiconductors) may be slightly weaker in 2024. ing. Overall, the chip segment is expected to grow at a mid-to-high single-digit percentage compared to 2023.
Central to Broadcom's success in the AI ​​space is its Jericho3-AI fabric chip and Tomahawk 5 Ethernet switch chip. Both of these devices help power the servers that coordinate the large amounts of data flowing through the data center.These devices help connect Broadcom customers tens of thousands GPU chips for AI training (such as those being developed by Nvidia). And as his AI models grow and more customers start using his AI models after training, Broadcom is working toward collaboration. One million GPUs for building the large-scale supercomputers of the future.
But these days, Broadcom is more than just a chip and computing hardware company. After making a major acquisition of cloud computing enterprise software company VMware in late 2023, the company is now offering the management tools data center customers will need after all of these new chips are installed. Our enterprise software portfolio includes Private AI Foundation. Similar to VMware's Cloud Foundation, the Private AI Foundation will work with Nvidia and others to piece together all the hardware and software tools organizations need to operationalize their newfound AI capabilities.
That's why Broadcom is making a good bet not only on AI semiconductors, but also on AI software.
Broadcom Business Benefits
Longtime Broadcom shareholders know this will never be the fastest growing business. This is mainly due to its highly diverse nature. But what Broadcom lacks in overall growth, it makes up for in profitability. In fact, that is the characteristic of CEO Hock Tan's management. They acquire complementary businesses and give them private equity treatment by narrowing down the acquired entities to their most profitable core businesses.
This is what Broadcom is working on with VMware. Either carve out a small part of your business and sell it, or refocus your attention on your biggest customers. While this is controversial, it actually appears that VMware's previously stagnant operations have moved into growth mode again. Tan and his team top reported that he expects VMware's revenue to increase by double-digit percentages in each subsequent quarter through the remainder of this year.
A few months ago, I was hesitant to call Broadcom a top buy in semiconductor stocks. However, after seeing the big financial results related to technology ( metaGoogle, and Amazone.g.), I'm changing my mind because data center spending is expected to increase significantly starting this year.
The stock still trades at about 31 times trailing 12-month free cash flow, the same as since the last earnings update.But with spending on new data centers and AI likely to surge in the coming years, Broadcom could be a big winner with both chips. and The forefront of software. So today's stock price may still be a long-term bargain for this proven market hitter. I plan to add a little more to my position at Broadcom.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Nicholas Rossolillo and his clients have held positions at Alphabet, Amazon, Broadcom, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and his Nvidia. The Motley Fool recommends his Broadcom. The Motley Fool has a disclosure policy.