Is Broadcom a Leading AI Stock Worth Buying?

Broadcom's connectivity solutions are generating significant excitement in the artificial intelligence (AI) sector.

Broadcom (AVGO) is increasingly recognized as a key player in AI investment discussions. However, it may not be as straightforward a choice as companies like Nvidia or Palantir, which have a large portion of their revenue stemming directly from AI-related products and services.

The company's expansive product offerings present a more diversified investment approach. Although diversification can provide stability, it may also limit a company’s ability to capitalize on groundbreaking technology trends. The question remains: is Broadcom an effective AI investment? Or is its wide-ranging product line too broad to fully benefit from the current AI wave?

Non-AI Growth Drivers for Broadcom

Browsing Broadcom's website could easily overwhelm you with its extensive range of products. Their offerings span hardware and software solutions, including cybersecurity, mainframe software, and essential connectivity products. Notably, one of their substantial software capabilities was acquired through the purchase of VMware.

VMware specializes in cloud-based virtual desktop services, which are valuable but not specifically AI-focused. Interestingly, VMware is a major contributor to Broadcom's revenue growth.

In the third quarter of fiscal year 2024 (ending August 4), Broadcom reported a staggering 47% year-over-year revenue increase, reaching $13 billion. However, if you remove VMware's contribution from the calculation (as it wasn’t included in the results for Q3 FY 2023), Broadcom's revenue growth slows to just 4% year-over-year.

Such modest growth figures are underwhelming for a company touted as a strong AI investment, especially when compared to other AI-centric firms that are experiencing rapid growth.

Yet, a closer examination reveals that specific AI-related products at Broadcom are performing exceptionally well.

Valuation of Broadcom's Stock

Broadcom's main AI-related products include advanced connectivity switches and custom accelerators, such as the tensor processing unit (TPU) developed for Alphabet. In Q3, the custom accelerators demonstrated remarkable 350% growth compared to the previous year, while ethernet switching devices, which are pivotal in directing data flow within servers, experienced a staggering 400% increase.

Although these growth rates are impressive, they may be overshadowed by other areas of Broadcom's business that are performing less robustly.

Despite this, market analysts predict a rebound in growth for Broadcom in fiscal year 2025, with 37 analysts estimating an average revenue growth of 17.5%. They anticipate that the benefits of AI will start to make a more substantial impact by next year. But does this optimistic outlook justify the current stock price?

Presently, Broadcom is priced at nearly 38 times its forward earnings, pointing to a premium valuation.

These expectations are considerable, and looking only at Broadcom's performance excluding VMware, it hasn’t met those high projections.

While Broadcom is an impressive company with a solid lineup of products, the wide breadth of its offerings makes it challenging to quantify the direct impact of AI on its overall business. The market seems to believe that positive outcomes for investors will become evident in 2025, but such expectations may be overly ambitious, especially given that AI trends have been in play for around a year and a half.

In conclusion, there are likely more compelling AI stocks available than Broadcom. Many of these alternatives not only demonstrate faster growth rates but also offer more attractive pricing compared to Broadcom, including companies like Alphabet and Meta Platforms. While Broadcom might prove skeptics wrong, the current high stock price makes indulgent investment risky.

Broadcom, AI, Investment