With shares up by over 500% over the last five years, Broadcom (AVGO +4.42%) has been a big winner in the artificial intelligence (AI) boom. Let's dig deeper into the pros and cons of the stock to determine if it can generate similar returns over the next half-decade.
Why Broadcom?
The current iteration of Broadcom came to be from the 2016 merger of Avago Technologies and Broadcom Corporation to unlock synergies and better meet the demands of large clients. It specializes in semiconductor products, enterprise software, and data center equipment. And it emerged alongside Nvidia as an ideal way for investors to bet on the picks and shovels of the AI gold rush.
NASDAQ: AVGO
Key Data Points
Unlike Nvidia, which is mainly known for its high-end general-purpose graphics processing units (GPUs) like the H100 and A100 (which train ChatGPT), Broadcom focuses on client customization.
The company is a leader in the market for application-specific integrated circuits (ASICs), which are chips designed specifically for a particular company's use case. Broadcom's more than three decades of custom chipmaking have given it the experience and customer relationships needed to quickly pivot to the growing AI-related demand. The company's major clients include Alphabet's Google and Meta Platforms.
Business is booming
AI-related excitement is helping boost Broadcom's operational results. Second-quarter revenue jumped 43% year over year to $12.49 million, powered by demand for data center hardware and Broadcom's recent acquisition of VMware, a software company specializing in virtual machines, which run programs and deploy apps on the cloud.
While Broadcom is far from a pure play on AI, its footprint in different technology niches gives it welcome diversification. And while this strategy could limit near-term growth relative to more specialized rivals like Nvidia (which saw sales jump 262% in its most recent quarter), it gives Broadcom investors more safety because it is less vulnerable to a potential slowdown in AI chip demand.
Image source: Getty Images.
Over the next five years, the chip industry may eventually face overcapacity as technological progress begins to plateau and data center clients stop upgrading their hardware as frequently. So Broadcom's diversification could become more useful over time.
Broadcom's bottom line is also impressive, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $7.43 billion -- a whopping 59% of revenue. This metric adds back non-cash expenses like stock-based compensation and temporary restructuring charges related to its recent buyout of VMware.
Is Broadcom stock a buy before the stock split?
Despite its healthy fundamentals, Broadcom started capturing many retail investors' attention after announcing a massive 10-for-1 stock split, designed to slash its quadruple-digit stock price by 90% when it goes live on July 15. Stock splits don't change a company's market cap (the value of all its shares combined) or its valuation relative to earnings. But they can make shares more liquid and serve as a powerful signal that a company's equity is moving in the right direction.
But regardless of the stock split, Broadcom looks like a solid way to bet on the long-term future of the AI industry.
The company is growing at a respectable clip, and its diversification into different types of technology could provide a layer of protection against a potential slowdown in chip demand. With a forward price-to-earnings (P/E) multiple of 38, it is also relatively affordable compared to Nvidia, which trades for 52 times projected earnings. Broadcom looks capable of outperforming over the next five years and beyond.
