Where will Broadcom be in 3 years?

With Broadcomhis (AVGO 3.75%) With future earnings in focus for many tech investors, I wanted to take a longer view and examine where stocks could be in three years — not where they’ll be trading in the next three weeks.

As such, let’s take a closer look at the tech company, what exactly it does, and where its stock could be headed.

A purchase machine

Broadcom has a long history of acquisitions. In fact, if you’ve ever wondered why a company called Broadcom has the ticker symbol “AVGO,” it stems from Avago’s acquisition of Broadcom in 2016. Avago decided to keep its ticker symbol, but took the Broadcom name.

At the time, the business brought together the leader in analog semiconductor devices (Avago) and the leader in semiconductor solutions for wired and wireless communications (Broadcom). But even before this big deal, Avago, originally part of Hewlett-Packard, had made a number of sizeable acquisitions, including LSI as well as Infineon’s Polymer Optical Fiber business. It later bought storage networking company Brocade in 2017.

Following the Brocade deal, Broadcom shifted gears and began acquiring software companies, including CA Technologies and cybersecurity company Symantec. More recently, the company made another huge deal, buying VMware for about $86.3 billion in cash and stock.

These various deals brought Broadcom into a variety of different businesses. In terms of semiconductor solutions, these include offerings such as Ethernet and switches, fiber optics, broadband access, set-top boxes, RF semiconductor devices and storage. Meanwhile, on the software solutions side of its business, it has solutions for things like database management, cyber security, SAN management, cloud computing, virtualization and even payment authentication.

In total, Broadcom has 26 divisions that encompass both semiconductor infrastructure and software infrastructure.

Image source: Getty Images.

AI opportunity

Networking is Broadcom’s biggest business, and in this the company has benefited from the current development of artificial intelligence (AI). while Nvidia was the biggest beneficiary of this build, its graphics processing units (GPUs) aren’t the only component that goes into a GPU cluster.

Broadcom also has critical components, including switches and NICs (network interface cards). Switches allow two or more devices to communicate with each other, while NICs are required to connect to a network.

As clusters get larger, Broadcom believes that the networking side of the cluster will become increasingly important. The reason is that it will cause a distributed computing challenge that needs to be solved.

In addition to building networks, Broadcom also builds custom chips (application-specific integrated circuits, or ASICs) for customers. For example, it is behind The alphabet tensor processing unit for AI workloads. Broadcom sees this as a big opportunity, as companies will want custom silicon to run AI-specific workloads more efficiently than can be run with general-purpose GPUs.

Analysts at Morgan Stanley are very bullish on this opportunity, estimating Broadcom’s ASIC revenue to be from $3 billion in fiscal 2023 to $10 billion in fiscal 2025. This optimism stems from the company’s added two new customers in addition to Alphabet.

Overall, the company saw strong growth in AI revenue, with AI revenue up 280% year-over-year to $3.1 billion in Q2 (ended May 5).

Other businesses are mixed

While Broadcom’s AI business is doing great, its other businesses have struggled. The biggest reason behind this stems from cyclical weakness in the enterprise and telecom spaces. Broadcom believes that both service storage and broadband revenues are close to being achieved.

That said, that’s why its total revenue, excluding VMware, only grew 12% in its fiscal second quarter, despite huge AI revenue growth.

Meanwhile, with VMware, the company is currently in the process of transitioning all of its software products to a subscription service. It said about 3,000 of its top 10,000 customers have already signed up to build an on-premise self-service virtual private cloud. Broadcom has a solid history of integrating acquisitions, and VMware’s transition to a subscription service looks like a good long-term move. It also recently released some tools for its software-defined edge products to help edge computing customers deploy AI tools.

Where the stock might be headed in three years

AI will be Broadcom’s biggest opportunity in the next few years. This includes its networking solutions as clusters grow in size and complexity, as well as with custom chips. Then, it needs to see a rebound in its more commercialized businesses. Meanwhile, management estimated that VMware would grow its revenue by double digits over the next three years.

These growth opportunities are why analysts currently expect the company’s earnings per share to rise from the $4.75 expected this fiscal year (ended October) to $8.59 in fiscal 2027, just over three years.

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Broadcom has traded at a fairly wide range of price-to-earnings (P/E) ratios over the past five years, from about 25 to 75 times. In the middle of that range, though, you’re looking at a stock around $430 if it can extend its gains as expected.