Since the dawn of artificial intelligence (AI), the companies at the forefront of this groundbreaking technology have generated impressive gains for shareholders. Chief among these have been the so-called "Magnificent Seven" stocks.
The group is made up of some of the world's most recognizable companies, including Nvidia, Meta Platforms, Alphabet, Tesla, Amazon, Apple, and Microsoft. Each of these companies is an industry leader, and every member of the collective has delivered stock price gains of 100% or more since early 2023.
However, those who focused solely on these AI bellwethers have likely missed out on one of the crucial players in the AI boom. In fact, investors might be surprised to find that Broadcom (AVGO 0.12%) stock has outperformed every member of the Magnificent Seven over the past year, surging 142%, and is poised to move higher. I would submit that the semiconductor and data center specialist has the momentum to join the $3 trillion club by 2027.
Image source: Getty Images.
Chips ahoy!
The rapid and ongoing expansion of data centers has been central to the accelerating adoption of AI. While Broadcom made a name for itself in the semiconductor industry, the company is also a key supplier of the networking components and accessories that are essential to data center operations, in addition to its product offerings in the broadband, cable, and mobile sectors. Broadcom boasts that "99% of all internet traffic crosses through some type of Broadcom technology." This puts the company in the position to supply critical components for the ongoing data center buildout required to support AI.
Perhaps the most important of these are Broadcom's Application-Specific Integrated Circuits (ASICs), which are semiconductors that can be customized for specific use cases. Just last month, Broadcom announced a multibillion-dollar deal with ChatGPT creator OpenAI to supply 10 gigawatts of these specialized chips over the coming four years.
Broadcom's ASICs are expected to help OpenAI improve speed while also being more energy efficient. This deal established Broadcom's ASICs as a viable alternative to Nvidia's industry-leading graphics processing units (GPUs), which currently control a dominant 92% share of the data center GPU market.
Broadcom's financial results reveal the impact. In the third quarter, Broadcom generated record revenue, climbing 22% year over year to $15.9 billion, which fueled adjusted earnings per share (EPS) of $1.69, a 36% increase.
Broadcom believes its AI opportunity will rise to between $60 billion and $90 billion by 2027 for its three existing hyperscale customers. During the earnings call, CEO Hock Tan said one of the company's major prospects -- which we now know was OpenAI -- had approved a production order for its ASICs. The deal is expected to generate $10 billion in additional revenue next year. Broadcom is also "deeply engaged" with other hyperscalers for its custom AI chips, which could fuel the company's next leg higher.
NASDAQ: AVGO
Key Data Points
The path to $3 trillion
Given its crucial role in the data center space and its GPU-alternative processors, Broadcom is well positioned to profit from the continuing AI boom.
Broadcom is expected to generate revenue of $63.3 billion in 2025, according to Wall Street estimates, giving it a forward price-to-sales (P/S) ratio of roughly 29. If the stock's P/S remains constant, Broadcom will need to generate revenue of roughly $101 billion annually to support a $3 trillion market cap.
Wall Street's expectations are bullish, guiding for revenue growth of 29% annually over the coming five years. If the company hits those targets, it could surpass $100 billion in revenue and achieve a $3 trillion market cap as early as 2027. Given the company's accelerating results in recent quarters and that it's courting new hyperscale customers, this timeline could be conservative.
Nvidia CEO Jensen Huang has gone on record saying that data center spending will rise to between $3 trillion and $4 trillion over the coming five years. This represents a significant opportunity for Broadcom, as its ASICs are viewed as a viable alternative to GPUs, particularly when energy efficiency is a key consideration. If the company can carve out just a portion of Nvidia's market share -- and I have no doubt that it can -- the sky's the limit for Broadcom.
Despite the recent surge in its stock price, Broadcom still sells for less than 32 times next year's expected earnings. Furthermore, it sports a price/earnings-to-growth (PEG) ratio of 0.42, when any number less than 1 is the hallmark of an undervalued stock.
That's why I believe Broadcom stock is a buy and on its way to membership in the $3 trillion club.
