Is it too late to buy Broadcom stock?

Artificial intelligence (AI) has supercharged semiconductor chipmakers’ business over the past year, and in turn, their stocks. Broadcom (AVGO -2.19%) is among those AI beneficiaries as shares have soared from a 52-week low of $79.51 a year ago to $185.16 in 2024.

Added to that was the company’s announcement of a 10-for-1 forward stock split, which sent the stock to an all-time high. After the split took place in July, Broadcom’s stock has dipped a bit, but is stubbornly staying well above the trough.

Given the dramatic rise in Broadcom stock over the past year, does this mean it’s too late to buy the stock? Here’s a look at the company to help you assess whether there’s still a positive opportunity for Broadcom over the long term.

Factors in Broadcom’s sales growth

One element to consider when investing in Broadcom is how the company’s business will scale over time. It is currently experiencing incredible year-over-year sales growth. For example, in its fiscal third quarter ended Aug. 4, Broadcom generated $13.1 billion in revenue, a 47 percent year-over-year increase.

But that growth is primarily due to its acquisition of VMware, which took place in November 2023. Excluding VMware’s contribution, Broadcom’s 47% year-over-year growth would have been just 4% in Q3.

VMware is the leading provider of virtualization software that enables IT organizations to run multiple operating systems on a single server. It’s like having multiple computers in one, and it’s an essential capability in the IT industry. But acquisition alone is not the only factor driving revenue growth.

Broadcom shifted VMware’s offerings to a software-as-a-service (SaaS) model. This change means customers now rent VMware software instead of buying it, providing Broadcom with ongoing and predictable subscription revenue.

Another factor driving sales growth is that VMware helps companies run AI technology in their private cloud computing environment, rather than in a public one such as Microsoft-owned by Azure. Many companies prefer this for privacy and security reasons, and it can also reduce costs.

This capability is one of the reasons Broadcom acquired VMware. This not only expands its software offering, thus complementing its hardware products, but Broadcom now offers a more complete AI solution for customers.

Other Broadcom pros and cons

Speaking of AI, how is Broadcom doing in this key growth area? The company’s AI-related revenue from its semiconductor division has not only grown over time, but growth is also accelerating.

Last year, AI-related sales accounted for about 15% of the division’s revenue. In fiscal 2024, AI’s contribution is expected to reach 35% and account for more than $10 billion of the company’s estimated $51.5 billion in full-year revenue.

Part of Broadcom’s AI success comes from its work building custom AI accelerators for cloud computing hyperscalers like Microsoft. These accelerators are essential for increasing the speed of AI systems.

During the company’s fiscal third quarter earnings call, CEO Hock Tan described Broadcom’s sales growth in this area, stating, “As you know, our hyperscale customers continue to expand and expand their AI clusters. Custom AI accelerators have grown three and a half times per year. per year.”

However, Broadcom acknowledged, “a relatively small number of customers represent a significant portion of our net revenue.” For example, Apple accounted for 20% of Broadcom’s sales in fiscal 2023.

If the firm loses any of these customers, it could materially harm Broadcom’s revenues. Of course, the opposite is also true. When Apple recently announced its new iPhone 16 devices, the news boosted Broadcom’s shares.

Broadcom stock decision

AI is likely to continue to be a boon for Broadcom for some time to come. In fact, the company expects sales to continue to grow this year. It aims for fiscal fourth-quarter revenue to hit $14 billion. This is a 51% increase from the previous year’s $9.3 billion.

In addition, Broadcom offers a dividend, adding a source of passive income to your investment. The company’s dividend yield is a decent 1.3%, and Broadcom has a good growth track record, increasing its dividend for 13 consecutive years.

Another consideration is what Wall Street analysts think. The current consensus among them is a “buy” rating on Broadcom stock, with a median stock price target of $195.

These factors, the company’s mix of AI hardware and software, and its focus on private clouds for AI workloads give it a solid strategy to carve out its share of the AI ​​market. Accordingly, Broadcom is an attractive long-term investment.

That said, Broadcom stock’s price-to-earnings ratio (P/E ratio) is currently at 146. Contrast this with the AI ​​semiconductor giant NvidiaP/E multiple of 56, and Broadcom looks expensive.

Data by YCharts.

So while it’s not too late to benefit long-term from an investment in Broadcom, for now the ideal approach is to wait for the stock to dip again before buying. In the meantime, Broadcom is a worthwhile stock to put on a list of investment opportunities to watch.