Broadcom Stock Soars in 2024: Is It a Good Buy for 2025?

The custom AI chipmaker Broadcom has seen a significant increase in its stock value during 2024, making it a point of interest for investors. As of December 6, 2024, Broadcom's shares have soared by 63%, outpacing the S&P 500, which returned 29% in the same period. This surge can partially be attributed to Broadcom's recent 10-for-1 stock split in July, which has made shares more accessible to a wider range of investors.

Over the past decade, Broadcom's stock performance has been remarkable, with a staggering return of 2,140%. An investment of $1,000 in Broadcom ten years ago would now be worth approximately $22,400, while the broader market has only returned 252% during that time.

With such impressive past performance, many might wonder if Broadcom stock is still a good purchase as we approach 2025.

Overview of Broadcom's Financials

Market Cap	Dividend Yield	Wall Street's Projected 5-Year Annualized Earnings Growth	Forward P/E
$839 billion	1.2%	20.1%	29.1

As of December 6, 2024, Broadcom has a market capitalization of $839 billion and a reasonable forward price-to-earnings (P/E) ratio of 29.1. The company also offers a dividend yield of about 1.2%. Investors should note that Wall Street expects the company's earnings to grow by 20.1% annually over the next five years.

Broadcom's history is primarily defined by a growth-by-acquisitions strategy. In late 2023, the company made headlines by acquiring VMWare, a significant software provider specialized in virtualization and cloud services.

Broadcom's Ventures into Artificial Intelligence

Broadcom is positioning itself as a significant player in the artificial intelligence (AI) sector. The company's product offerings include custom AI chips and high-performance Ethernet networking products for data centers that handle AI processing workloads.

Unlike its competitor, Nvidia, which focuses primarily on graphics processing units (GPUs), Broadcom specializes in application-specific integrated circuits (ASICs) that enhance the processing speed for AI tasks. Notable customers for Broadcom's custom AI chips include tech giants such as Alphabet and Meta Platforms.

While Broadcom did not specify the exact revenue from its AI-related products for the third quarter of fiscal 2024, estimates suggest that it generated between $3.1 billion and $3.2 billion, representing about 24% of total revenue.

Examining Recent Financial Trends

Broadcom's recent financial results offer a clearer picture of its sustainable growth, especially after acquiring VMWare, which closed in November 2023. For the third quarter of fiscal 2024, which concluded on August 4, Broadcom reported a remarkable revenue increase of 47% year over year, totaling $13.1 billion. Without the contributions from VMWare, revenue grew 4% year over year.

Breaking down the revenue by segment, semiconductor solutions generated $7.3 billion, a 5% increase, while infrastructure software rose dramatically by 200% to $5.8 billion.

However, the growth in the chip segment was modest at 5% due to challenges in non-AI sectors, which include networking, storage, wireless, broadband, and industrial applications. Fortunately, some of these markets are showing signs of recovery.

The surge in Broadcom's AI chip business is noteworthy, with CEO Hock Tan reporting that revenue from custom AI chips increased by 350% year over year.

On the profitability front, Broadcom's GAAP net income showed a temporary decline due to a one-time non-cash tax provision and acquisition-related costs. Adjusting for these exceptional items, the net income increased by 33% to $6.12 billion, resulting in earnings per share (EPS) growing by 18% to $1.24.

Broadcom's profitability is impressive, with an adjusted profit margin of about 47%. By comparison, Marvell Technology, another major player in the AI chip space, had an adjusted profit margin of about 25% in its latest quarter.

Upcoming Fiscal Q4 Results

Investors are looking forward to more data as Broadcom prepares to announce its fourth-quarter earnings results for fiscal 2024, which ended on November 3. Scheduled for release on December 12, the report is expected to provide insights and guidance for fiscal 2025.

Management has projected Q4 revenue of $14 billion, indicating anticipated growth of 51% year over year. Analysts expect the adjusted EPS for Q4 to rise by 26% to reach $1.39, while overall revenue is expected to climb by 52% to $14.1 billion.

Valuation Insights

Broadcom's current stock valuation appears to be reasonable. As of the latest data, it trades at a forward P/E ratio of 29.1. This is justifiable given that Wall Street expects the company to achieve earnings growth of approximately 27.6% in the next fiscal year and an average annual growth rate of 20.1% over the next five years. Additionally, the company's free cash flow consistently exceeds its net income, making its valuation based on price-to-free-cash-flow often better than its earnings-based valuation.

Conclusion: Is Broadcom Stock a Good Buy?

Given the promising growth prospects of Broadcom's infrastructure software segment and its thriving AI chip business, the stock seems to be a worthy investment. However, investors interested in the rapidly evolving AI sector should consider diversifying their investments across multiple AI companies rather than betting solely on one established player like Broadcom.

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