Meet the Stock-Split Stock That Soared 10,720% Over 15 Years: Is It Ready for the $1 Trillion Club?

This leading semiconductor and software company has been experiencing significant growth, largely fueled by the emergence of next-generation artificial intelligence (AI).

In the past, industrial and oil companies were seen as the most valuable businesses globally. For instance, in 2004, General Electric and ExxonMobil were the largest firms by market capitalization, sitting at $319 billion and $283 billion, respectively.

However, a lot has changed over the last two decades. Today, the world's most prominent technology companies dominate the top rankings. Currently, Apple, Nvidia, and Microsoft all hold valuations exceeding $3 trillion, with the leadership position frequently shifting among them. Additionally, Alphabet, Amazon, and Meta Platforms also boast memberships in the exclusive $1 trillion club, holding valuations of $2 trillion, $1.9 trillion, and $1.5 trillion, respectively.

With a market capitalization of around $818 billion as of now, Broadcom (AVGO) finds itself as a strong contender to join these tech giants. The company plays a crucial role in the AI infrastructure, and as AI technology continues to gain traction, Broadcom is likely to reach the $1 trillion mark sooner than expected.

Understanding Broadcom's Contributions

Broadcom manufactures various semiconductor, software, and security solutions that have a wide-ranging impact across multiple sectors, including cable, broadband, mobile, and data centers. Company management reports that approximately "99% of all internet traffic passes through some form of Broadcom technology." This extensive reach positions Broadcom as an essential player in the rapid advancement of AI, especially as generative AI primarily operates within data centers and cloud environments.

Moreover, Broadcom’s acquisition of VMWare last year presents a chance for substantial growth. The management is diligently working to transition VMWare's offerings to a subscription licensing model, which would pave the way for increased recurring revenue. The company is also making significant headway in cross-selling these new products to its existing clientele.

The results of these strategies are evident. In Broadcom's fiscal third quarter (ending August 4), revenue soared by 47% year-over-year, reaching $13.1 billion. Additionally, its adjusted earnings per share (EPS) rose by 18% to $1.24. Thanks to this consistent growth, management has raised its total revenue forecast for the year to $51.5 billion, signaling a 44% increase.

In light of these impressive results, Broadcom's leadership opted for a 10-for-1 stock split, which was successfully executed in mid-July.

Charting a Course for the $1 Trillion Mark

Broadcom's wide array of chips and components, integral to data center operations, gives it a strong advantage in the ongoing AI revolution.

Wall Street expectations suggest that Broadcom is projected to generate $51.61 billion in revenue for 2024, translating to a forward price-to-sales (P/S) ratio of nearly 16. To support a $1 trillion market cap with its current P/S ratio, Broadcom would need to achieve approximately $63 billion in annual sales.

Analyst consensus points to revenue growth of 44% in 2024 and 14% in 2025. If Broadcom can meet these targets, it may reach a $1 trillion valuation by 2026. Given the rapid and increasing adoption of AI, these projections might even prove conservative.

Indications are strong that Broadcom could soon be part of the trillion-dollar club. The management reported a remarkable 200% surge in infrastructure software revenue during the third quarter, and it anticipates AI-related revenue to reach over $12 billion this year, making up 23% of the total anticipated revenue.

While the generative AI market's potential is still unfolding, estimates continue to rise. According to McKinsey & Company, the economic value of generative AI could range from $2.6 trillion to $4.4 trillion annually over the next decade, with this figure doubling when embedded software revenue is included.

Broadcom's exceptional performance and the excitement surrounding its stock split have driven up its share price, alongside a rise in overall valuation. The stock currently trades at 36 times its forecasted earnings, a premium compared to the S&P 500's 28-fold multiple.

Nonetheless, Broadcom's stock has surged by 10,720% since 2009, significantly outperforming the S&P's 471% return, illustrating why this premium may be well-deserved.

Note: The information presented here is intended for general informational purposes and should not be construed as investment advice.

investment, technology, AI