Why the stock could be the next AI winner.
If you invested a mere $10,000 in Broadcom (AVGO 2.20%), then called Avago Technologies, shortly after the stock went public in 2009, and never sold any shares, you’d be pretty close to having a million-dollar investment in just 15 years’ time.
While Broadcom may not put up the same type of returns over the next 15 years, the stock still has the potential to be a millionaire maker.
The next big AI winner
While rival Nvidia has been the biggest beneficiary of the early artificial intelligence (AI) infrastructure buildout, Broadcom is well positioned to become the next big AI winner. That’s not to say, however, that the company isn’t already doing well in this area.
For example, the company has continued to push up its forecast for AI revenue throughout the year. Last fall, it expected to generate around $7.5 billion in AI revenue for 2024. It later bumped that up to $10 billion and then $11 billion. After its most-recent quarter, it increased its expectations for AI revenue to $12 billion.
The company participates in the buildout of AI data-center infrastructure in two main ways: networking components and custom chips.
On the networking side, the company designs a number of components that go into the building of graphics processing units (GPUs) clusters, which are a group of interconnected computers that work together as a single system that has GPUs on each node (an individual server within the cluster). It is these supercomputer GPU clusters that are being used to train AI large language models (LLMs).
While GPUs get all the press given that the number of them going into these clusters continues to grow, they are not the only components needed. On Broadcom’s end, it supplies the switches and network interface cards (NICs) that are needed to build these clusters. Switches allow two or more devices to communicate directly with each other, help manage the flow of data, and avoid network congestion. NICs, meanwhile, are needed to connect computers to a network to be able to communicate with other computers on the network.
Clusters continue to grow exponentially in size with more and more GPUs. Broadcom sees this growth creating a distributed-computing challenge for which Ethernet switches will be at the heart of handling AI workloads and transferring data between GPUs.
Broadcom is not without competition. Nvidia offers a competing switching technology to Ethernet called InfiniBand, which it got as part of its acquisition of Mellanox, while Intel has developed a technology called Omni-Path. For its part, Broadcom said it thinks that all hyperscalers will be using Ethernet by the first half of 2025.
Perhaps the even bigger opportunity moving forward for Broadcom, though, is through the design of custom AI chips (application-specific integrated circuits, or ASICs) for customers.
Its first customer in this area was Alphabet, for which it helped create the company’s tensor-processing unit for AI workloads. It has added two additional customers this year, which are believed to be Meta Platforms and China’s ByteDance, owner of TikTok. There are also reports that OpenAI has been in discussions with Broadcom to build its own custom AI chip.
With Broadcom’s ASICs, customers are able to customize the chips to meet their specific computing and power needs. This is a huge and growing market, and Broadcom is a leader in the ASIC space. With AI capital expenditure (capex) budgets increasing, Broadcom is very well positioned to capture what could be the next leg of the AI infrastructure buildout: custom AI chips.
Image source: Getty Images.
Is it time to buy the stock?
Broadcom appears to be in the early innings of the custom AI chip revolution. This has the opportunity to be a huge market, and the company is the leader in the ASIC space.
From a valuation perspective, the company now trades at a forward price-to-earnings (P/E) ratio of about 26 based on next year’s analyst estimates. Given the growth opportunities in front of the company, that’s not an expensive valuation.
AVGO PE Ratio (Forward 1y) data by YCharts.
If Broadcom can capitalize on its custom AI chips and advanced networking opportunities, the stock has the makings to be the next big AI winner and a potential millionaire maker.
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. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.