An expert in semiconductors is emerging as a strong player in the race for artificial intelligence (AI).
Since AI has started to gain traction, top companies involved in this technology have delivered remarkable returns to shareholders. Among these firms, the “Magnificent Seven” stocks are particularly notable.
This select group comprises globally renowned companies: Nvidia, Meta Platforms, Alphabet, Tesla, Amazon, Apple, and Microsoft. Each is a dominant force in its respective sector, with all members experiencing stock price increases exceeding 100% since early 2023.
However, those focusing solely on these AI leaders might overlook a crucial player in the AI surge. Surprisingly, Broadcom (AVGO +1.36%) has outperformed every member of the Magnificent Seven. In fact, Broadcom’s stock has skyrocketed by 142% over the past year, positioning the company for further growth. I think this semiconductor and data center specialist could reach the $3 trillion market cap by 2027.
Chips, hey!
The rapid growth of data centers is pivotal for enhancing AI adoption. Though Broadcom is widely recognized in the semiconductor sector, it also produces a variety of products for broadband, cable, and mobile markets, along with critical network components for data center operations. The company proudly claims that “99% of all Internet traffic goes through some kind of Broadcom technology.” This gives Broadcom a vital role in supplying essential components needed for the ongoing expansion of data centers that support AI.
One of the most significant components is Broadcom’s application-specific integrated circuits (ASICs). These semiconductors can be tailored for specific applications. Just last month, Broadcom secured a multibillion-dollar agreement with OpenAI, the creators of ChatGPT, to supply 10 gigawatts of these specialized chips over the next four years.
These ASICs are expected to enhance OpenAI’s speed and energy efficiency. The deal positions Broadcom’s offerings as a legitimate alternative to Nvidia’s graphics processing units (GPUs), which currently dominate the data center GPU market with a hefty 92% share.
And the financials reflect this growth. In the third quarter, Broadcom reported record revenue of $15.9 billion, marking a 22% increase year-over-year, with adjusted earnings per share climbing 36% to $1.69.
Broadcom anticipates the AI market opportunity will grow from $60 billion to $90 billion by 2027 for its three major hyperscale customers. During an earnings call, CEO Hock Tan mentioned that one key client, now known to be OpenAI, approved an ASIC manufacturing order likely to bring in an additional $10 billion in revenue next year. Broadcom is also actively working with other hyperscale clients on customized AI chips, which could further propel the company forward.
The road to $3 trillion
Given its important role in the data center sector and its processors as viable replacements for GPUs, Broadcom seems strategically positioned to capitalize on the ongoing AI surge.
Wall Street forecasts indicate that Broadcom could generate $63.3 billion in revenue by 2025, translating to a forward price-to-sales ratio of about 29 times. To support a $3 trillion market cap, Broadcom would need to generate roughly $101 billion in annual revenue, based on the expected stock P/S ratio.
Predictions are optimistic, anticipating a 29% annual revenue increase over the next five years. If Broadcom meets these targets, it could surpass $100 billion in sales and hit a $3 trillion market cap as soon as 2027. Considering the company’s accelerating performance and new hyperscale clients, this timeline may actually be on the conservative side.
Nvidia’s CEO Jensen Huang has mentioned that data center spending could rise from $3 trillion to $4 trillion in the next five years. This represents a significant chance for Broadcom, as its ASICs are considered a viable option compared to GPUs, especially given the focus on energy efficiency. If the company can seize some of Nvidia’s market share—which I believe it can—the opportunities for Broadcom could be substantial.
Even with its recent stock gains, Broadcom is trading at less than 32 times next year’s projected earnings. Plus, its price-to-earnings ratio (PEG) stands at 0.42, indicating it could be undervalued, as a ratio below 1 often suggests.
For these reasons, I think Broadcom shares are a strong buy and are well on their way towards joining the $3 trillion club.
