The tech-laden Nasdaq Composite index hit its most recent high on Dec. 16, 2024, but it has pulled back since then on account of various factors such as the tariff-fueled turmoil and a potential slowdown in artificial intelligence (AI) spending.
Specifically, the Nasdaq Composite is down just over 12% since its most recent high. This puts the index in correction territory, as a stock market correction refers to a drop of 10% to 20% in a major index. However, AI adoption is currently in its early phases. Consulting firm PwC reports that the adoption of AI could boost the global economy by 15 percentage points by 2035, which is why it won't be surprising to see companies and governments continue to invest in this technology in the long run.
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That's why now would be a good time for investors to consider investing in shares of Broadcom (AVGO 0.23%). The stock is down 13% so far in 2025, but a closer look at the bigger picture will tell us that it can deliver healthy long-term gains thanks to the proliferation of AI.
Let's check out why buying Broadcom following its recent pullback is a good idea.
Broadcom is sitting on a massive growth opportunity
Though Nvidia is currently the leader in the AI chip market by a big margin, Broadcom is the second most important player in this space, according to JPMorgan. That's not surprising as Broadcom sold $12.2 billion worth of AI chips in fiscal 2024 (ended in November last year). That was a huge jump of 220% from the preceding year.
NASDAQ: AVGO
Key Data Points
This terrific jump can be attributed to the rapidly growing demand for the custom AI processors that Broadcom designs. Customers have also been lining up to buy its networking chips to enable faster data transfer in AI data centers. Broadcom has carried forward this impressive momentum in the new fiscal year.
The company's AI revenue came in at $4.1 billion in the first quarter of fiscal 2025, a tremendous increase of 77% from the year-ago period. This red-hot growth streak is here to stay -- the demand for custom AI processors is set to grow substantially in the long run thanks to the advantage that these chips have over central processing units (CPUs) and graphics processing units (GPUs).
That's because custom processors are designed to perform specific tasks instead of general-purpose computing that's done by CPUs and GPUs. As a result, custom processors are more efficient at performing the tasks they are designed to do. This is the reason major cloud computing providers such as Meta Platforms, Alphabet, and others have been developing in-house AI processors to deliver improved AI performance and reduce costs simultaneously.
Alphabet, for instance, recently introduced its seventh-generation custom chip designed for tackling AI inference tasks. The company points out that this new chip, known as Ironwood, delivers a 10x increase in performance over its previous custom chip and is 2x more power efficient. Alphabet is reportedly a Broadcom customer, tapping the latter to design its custom AI chips.
And now, OpenAI and Meta Platforms are also expected to manufacture their custom AI processors with Broadcom's help. All this explains why more customers are interested in getting their custom processors designed by Broadcom. The company currently designs custom AI processors and networking chips for three customers, pointing out that they have opened a huge revenue opportunity worth $60 billion to $90 billion over the next three fiscal years.
Importantly, Broadcom is on track to bring an additional four AI customers on board, which could significantly expand the end-market opportunity it is sitting on. So, Broadcom's AI revenue seems on track for exponential growth in the long run, and that could translate to impressive stock upside.
The potential growth and valuation make this stock attractive
Based on Broadcom's massive growth opportunity, analysts are expecting the company's earnings to increase by an impressive 36% in the current fiscal year to $6.63 per share. What's more, its bottom line is expected to grow in the healthy double-digits over the next couple of years as well. This is evident from the chart given below.
AVGO EPS Estimates for Next Fiscal Year data by YCharts
However, Broadcom may be able to easily grow at a faster pace than that pace, considering the tremendous end-market opportunity it is sitting on. Another thing worth noting here is that Broadcom's price/earnings-to-growth ratio (PEG ratio) is at just 0.53 based on the annual earnings growth it is expected to deliver over the next five years, according to Yahoo! Finance.
A PEG ratio of less than 1 means that a stock is undervalued with respect to the growth that it is expected to deliver over the next five years. Broadcom's multiple indicates that it is well below that threshold, suggesting that investors are getting a good deal on an AI stock that seems primed to deliver terrific long-term gains.
