Could the Prominent AI Corporation Worth $1 Trillion Be Poised for Significant Growth Following March 6th?
Broadcom, ticker AVGO (-2.59%), has seen a phenomenal surge over the past year, skyrocketing over 100% since January 2024. This stellar performance puts it in an elite group, the $1 trillion club, with only 11 global companies boasting such a gigantic market cap.
This meteoric rise has catchphrases like "AI arms race" echoing around Broadcom's operations, and it's no surprise, as a considerable chunk of these tech giants is planning to invest heavily in artificial intelligence. Broadcom isn't sitting idle; it's actively playing its part in this tech titan's tussle.
Driving the Stock: A Closer Look at Broadcom's Powerhouse Segments
Summarizing Broadcom's business is like trying to fit a square peg in a round hole, with an impressive roster of products ranging from enterprise software to cybersecurity, not forgetting its data center connectivity solutions. But a few vital areas drive the stock, and their success is the key to Broadcom's current market price.
First on the list is Broadcom's Tomahawk and Jericho connectivity switches. These switches are the data center's pulsing heart, directing the information flow, and in FY 2024, they raked in sales at an astounding 300% pace.
Next up, and arguably the spark that ignites Broadcom's growth engine, is its custom AI accelerators. Broadcom has been instrumental in helping AI giants, such as Amazon (AMZN) and Meta Platforms (META), design cutting-edge AI accelerators, tailored for AI-specific tasks. While these chips may not be as flexible as Nvidia's GPUs, they outperform them substantially in AI-specific workloads.
Broadcom's CEO recently estimated that the market for these AI accelerators could soar between $60 billion and $90 billion by FY 2027 – a colossal leap from its FY 2024 base of $12.2 billion. That's quite the growth spurt, and investors are paying close attention to Broadcom’s Q1 results to gauge just how fast these custom accelerators are growing.
If the growth falters in any way, it could mean trouble for Broadcom's stock, as it's currently priced at a premium compared to its peers. However, if the company reports robust growth and projects an incredible 2025 for this division, then expect shares to shoot up after the report.
The Premium Pricing: It's All About Expectations
While there's no denying the excitement surrounding Broadcom's prospects, it's essential to keep in mind that AI-specific accelerators account for a small fraction of Broadcom's overall business. In Q4, Broadcom's revenue hit $14 billion, with $4.5 billion of that coming from its networking division – a division that's heavily dependent on its custom accelerators and connectivity switches.
Sixty-four percent of this networking division can be traced back to these two segments. If Broadcom's estimates of a hefty $60 billion to $90 billion in custom accelerator revenue pan out, then this division's importance will undoubtedly skyrocket. But until then, it's still just a fraction of the bigger picture.
Therefore, investing in Broadcom requires a wise expectation management strategy. It must continue to report strong growth in its custom accelerator division to maintain this premium valuation. If it fails to do so, then it's fair game for a sell-off post-March 6 earnings announcement. But if it shows promising growth and predicts a bountiful 2025 for this division, then buckle up for some potentially exhilarating share price thrills after the report.
[1] Data Source: Broadcom's Company, Q3 2024 Conference Call Transcript.[2] Data Source: YCharts.[3] Data Source: Broadcom's Company, Q2 2024 Earnings Call Transcript.
- Given Broadcom's focus on artificial intelligence, many finance experts predict a significant increase in investments in this sector, with Broadcom set to play a significant role due to its custom AI accelerators.
- The success of Broadcom's custom AI accelerators has attracted the attention of notable tech companies like Amazon and Meta Platforms, leading to collaborations for AI-specific tasks and contributing to Broadcom's surging market valuation.
- As Broadcom's Q1 earnings approach in March, investors are closely monitoring the company's custom accelerator division, hoping for robust growth figures that could further boost its premium stock price.
- Although a substantial portion of Broadcom's revenue comes from its networking division, which includes custom accelerators and connectivity switches, the company must continually demonstrate strong performances in this sector to maintain its current premium valuation.
