"The times they are a-changin'," as Bob Dylan once sang.
Once upon a time, it was industrial and oil businesses that topped the list of the world's most valuable companies, but over the past 20 years, there's been a paradigm shift at the top. For example, General Electric and ExxonMobil were the largest companies in the world in 2004, when measured by market cap, clocking in at $319 billion and $283 billion, respectively.
A lot can happen over the course of two decades, and now, eight of the top 10 companies hail from the halls of technology. Microsoft and Apple are engaged in an epic battle for the title of the "world's most valuable company." Each currently tops out at roughly $3.3 trillion -- and the top spot has changed hands several times over the past week or so. Nvidia is nipping at their heels with a market cap of $3.2 trillion, well ahead of Alphabet and Amazon, with market caps of $2.2 trillion and $1.9 trillion, respectively. Meta Platforms is pulling up the rear in the $1 trillion club, with a market value of $1.2 trillion. The common denominator that has propelled many of these tech stocks higher is the advent of artificial intelligence (AI), and the technological revolution is just getting started.
With a market cap of roughly $851 billion (as of this writing), Broadcom (AVGO +4.58%) recently joined the top 10 and seems destined to join this elite fraternity of companies. The company enjoys a unique position in the AI infrastructure, and the prevailing secular tailwinds could propel it to membership sooner than later.
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You want chips with that?
Broadcom supplies a broad cross-section of semiconductor, software, and security solutions that reach into every corner of the mobile, broadband, cable, and data center spaces. In fact, the company notes that "99% of all internet traffic crosses through some type of Broadcom technology." This helps illustrate the company's critical place in the AI revolution, as this unique collection of technologies underpins the advancement of generative AI, which primarily exists in data centers and in the cloud, but is quickly moving to the edge.
The merger of VMWare late last year has been a priority for management as Broadcom worked to transition VMWare's products to a subscription licensing model. The cross-selling of these products to Broadcom's customer base has begun and will likely accelerate in the quarters to come.
The results show that business is booming. In the second quarter, revenue climbed 43% year over year to $12.5 billion, while its adjusted earnings per share (EPS) of $10.96 edged 6% higher. Management is expecting its robust growth to continue, guiding for raising its full-year revenue forecast to $51 billion, which would represent growth of 42%.
The company's robust results also led Broadcom to announce a 10-for-1 stock split which has sparked a new wave of interest in the company.
The route to $1 trillion
The extensive reach of Broadcom's semiconductors and other products, many of which are critical components of cloud and hyperscale data centers, makes it a key player in the AI revolution.
According to Wall Street estimates, Broadcom is expected to generate revenue of $51.24 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 16. If the stock's P/S remains constant, Broadcom will need revenue of roughly $60 billion annually to support a $1 trillion market cap.
NASDAQ: AVGO
Key Data Points
Interestingly, a quick check of the charts shows that Wall Street is guiding for revenue growth of 43% in 2024 and 16% in 2025. If the company hits those targets, it could achieve a $1 trillion market cap as soon as 2026. Furthermore, given the opportunity represented by the accelerating adoption of AI, those estimates might end up being on the conservative side.
There's evidence that Broadcom is on track to achieve those benchmarks sooner than later. Management noted that software revenue soared 175% in the second quarter, while AI revenue surged 280%. Management expects the company's AI-related revenue to grow to over $11 billion this year, which would represent 22% of its forecasted revenue for the fiscal year.
The adoption of AI is just getting started, so there could be much more to come. Generative AI is expected to generate economic value between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. If you include the revenue from embedded software, those numbers double.
Excitement regarding Broadcom's robust results and the stock split have driven the share price higher, resulting in a commensurate increase in its valuation. The stock is selling for 38 times forward earnings, a premium compared to a multiple of 28 for the S&P 500.
However, Broadcom's stock has gained 2,480% over the past decade, compared to just 182% for the S&P, so it isn't an apples-to-apples comparison.
Furthermore, given the breadth of the company's reach across the AI ecosystem and the vast opportunity at hand, I'd suggest Broadcom's premium multiple is justified.
