Will Broadcom be a trillion dollar stock by 2025?

Broadcom (NASDAQ: AVGO) has risen near the top of the pyramid when it comes to stocks that are considered strong investments in artificial intelligence (AI). Although it’s not quite up to par Nvidiait’s probably only a level or two below him. Broadcom is a huge company, worth about $780 billion.

That means it’s a stone’s throw away from reaching the illustrious $1 trillion market cap, as it only needs to grow by just 30% to achieve this impressive feat. But could it do so in 2025? Let’s take a look.

Broadcom’s growth figure is highly skewed

It’s not easy to summarize Broadcom’s work because it does so much. It provides its customers with hardware and software solutions in various industries and chip design services. On the hardware side, its network switches have received a lot of attention, as these devices are critical in building data centers designed to train AI models.

On the software side, Broadcom has products that enable companies to control their mainframe computers, which is essential in today’s increasingly digital business environment. It also has cybersecurity software, but its biggest software product came from an acquisition.

Last year, Broadcom acquired VMware, which allows its users to set up a virtual desktop on the cloud. This was a successful acquisition and is the main reason Broadcom grew revenue in its most recent quarter.

In the third quarter of fiscal 2024 (ended Aug. 4), Broadcom’s revenue rose 47% year over year to $13 billion. While that sounds impressive, what’s going on under the hood is much less so. If you subtract the effect of the VMware acquisition (which did not contribute to the previous year’s results), revenues increased only 4%. This is a substantial change and completely alters the way investors might look at Broadcom.

But that doesn’t mean AI isn’t helping Broadcom’s business. CEO Hock Tan had this to say during Broadcom’s Q3 earnings call:

When you break that down, it’s incredible growth. Connectivity switches increased by 400%, while custom AI accelerators such as AlphabetTensor Processing Unit (TPU), which provides better AI performance than an Nvidia GPU, increased by 350%!

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These parts of Broadcom were strong; the problem is that they are not a huge portion of its business, so the effect these segments have is reduced. But that could change next year.

Broadcom is set for another strong year

For fiscal 2025, Wall Street analysts expect Broadcom’s revenue to grow 17% year over year. This figure includes a fully integrated VMware, so it accurately represents the true picture of revenue growth. Additionally, earnings per share (EPS) are expected to rise from $4.82 this year to $6.17 next year, an increase of 28%.

Sounds like a great company to invest in if investors can pay a reasonable price for the shares. But at 35 times forward earnings, Broadcom is a bit expensive.

With Nvidia trading at 41 times earnings and growing much faster, it’s also in the same valuation range. So investors need to determine whether they need to look for the next Nvidia in Broadcom, or whether they should stick with Nvidia because it’s still performing at a high level.

Either way, Broadcom is still moving toward that $1 trillion market cap figure. Out of an average of 27 Wall Street analysts, all have a buy rating on the stock and predict the stock price will be around $199 a year from now. That’s a 19% increase from the current price, but not enough to grow the 30% needed to reach a $1 trillion market cap.

However, if Broadcom can deliver that level of stock performance, it will likely outperform the broader market (as measured by S&P 500), which typically rises about 10% annually, making Broadcom an excellent stock pick. If it grows 20% over the next year, it won’t be that far from the $1 trillion mark, and would likely hit that in 2026 if it can keep up its growth.

With strong and growing demand for its AI products, Broadcom should see strength in the coming years; while I’m not sure if it is best AI stock to buy, is a strong choice and will likely produce good returns for investors.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Will Broadcom be a trillion dollar stock by 2025? was originally published by The Motley Fool