After rising 400% over the past 5 years, can Broadcom still outperform the market in the future?

Investing in semiconductor stocks has generally been a great move in recent years. And Broadcom (AVGO 1.73%) was no exception to this. In five years, it has accumulated incredible gains for investors. Not only has it appreciated in value over that time, but the stock has also grown its dividends at a fairly high rate, making it an attractive investment option for both growth and dividend investors.

But can the stock continue to build on these gains and continue to be a market-beating investment to hang on to for the foreseeable future? Let’s take a look at the company’s financials, fundamentals and valuation to answer that question.

Will artificial intelligence take the stock to new heights?

One big reason to be optimistic about Broadcom’s future is the role it can play in artificial intelligence (AI). The company designs and develops software solutions for semiconductors and infrastructure. It offers enterprise automation services that help companies manage workloads across complex platforms and systems, giving them a “single point of control for all automation.”

Broadcom says it has experienced strong demand due to AI. In its most recent quarterly results, which ended May 5, it said revenue from its AI products hit a record $3.1 billion. Total consolidated revenue of $12.5 billion was up 43% year-over-year. Much of its recent growth, however, is due to its mammoth $69 billion acquisition of cloud computing business VMWare, which it completed last November.

Following the strong results, Broadcom raised its guidance for the year, now projecting consolidated revenue to reach $51 billion — up from a previous estimate of $50 billion. In its most recent fiscal year, which ended Oct. 29, 2023, Broadcom’s sales totaled $35.8 billion.

The company got bigger with the acquisition of VMWare, and with demand for AI products giving it a new boost, Broadcom has plenty of room for sales and profits to grow in the coming years.

Strong margins could make the stock look cheaper

Broadcom’s stock trades at a hefty 59 times its trailing earnings, which could deter some investors from investing in it. However, that multiple could drop quickly as the business generates excellent margins. In the last 12 months, Broadcom’s net income totaled $10.3 billion in revenue, totaling $42.6 billion, for a profit margin of 24%.

During that time frame, the company also generated free cash flow totaling $18.5 billion. The company pays a dividend and has been able to grow it over the years thanks to its strong free cash flow. Over the past four quarters, it has spent $8.7 billion on its dividends, leaving plenty of room for Broadcom to further invest in its operations and buy back shares. With deep pockets, there’s reason to be optimistic that Broadcom can take advantage of the opportunities that arise in AI in the future.

Should You Buy Broadcom Stock?

Broadcom’s returns have been exceptional over the past five years, totaling 400% and rising to 500% when dividend payments are included. Investors have done well by holding the stock. AI, however, could ensure that it continues to be a good buy for the next five years and beyond.

The big downside to today’s tech stock is its high valuation. But with some attractive growth opportunities in AI and high margins, its bottom line should grow significantly over the years, which may make it look like a cheap buy going forward.