Traditional investing wisdom says back picks and shovels stock options. The 21st Century’s gold rush is the technology revolution, and you’ll struggle to find a better tech picks and shovels supplier than Broadcom (AVGO:NASDAQ), in our view.
The semiconductors and ASICs (application specific integrated circuits) it designs and develops help power almost every part of the tech sphere. An estimated 99% of all internet traffic passes across its chips, which means it touches pretty much every major tech theme; automation, ecommerce, cybersecurity, cloud computing, and of course, AI (artificial intelligence).
San Jose, California-based Broadcom today operates across two primary segments: Semiconductor Solutions and Infrastructure Software. The former designs chips for networking, server storage, broadband, wireless communication and industrial applications, the traditional knitting of the business.
This part of the business is also one of the world’s leading custom silicon developers, working closely with customers like Alphabet (GOOG:NASDAQ), for example, to create ASICs which deliver superior performance and energy efficiency at lower cost for targeted workloads.
Infrastructure Software was traditionally the smaller part of the business, although not so much following the acquisition of VMware which completed in November 2023. A leader in cloud computing and virtualisation, VMware brought its software solutions into Broadcom’s portfolio, substantially diversifying its revenue and propelling the segment’s contribution massively.
VALUE-ADDING GROWTH
Broadcom shuns the growth-at-any-cost approach and works closely with its largest 600 to 700 customers to expand their use of its software, resulting in a highly attractive margin profile. Gross margins ran above 75% in full year 2024, with operating margins coming in at 26%.
Shares has written about Broadcom’s emerging revenue and earnings story as far back as May 2022 yet the wider investment community largely ignored the promising signs until late last year, when its AI revenue growth took markets by surprise.
Broadcom’s shares jumped 43% in December 2024, catapulting the firm into the exclusive $1 trillion club, as Shares speculated it might back in August.
Results for the 12 months to 31 October 2024 were strong but grabbing the headlines was commentary that Broadcom’s hefty investment in VMware and AI are paying off. ‘We are well on the path to delivering incremental adjusted EBITDA (earnings before interest, tax, depreciations and amortisation) at a level that significantly exceeds the $8.5 billion we communicated when we announced the deal’, Broadcom CEO Hock Tan said of the VMware deal on the earnings call. AI revenue spiked 220% in 2024 to $12.2 billion.
Broadcom is tapping into a fast-growing AI infrastructure market that’s just getting started. AI chip peer Nvidia (NVDA:NASDAQ) believes AI data centre spending could reach $2 trillion over the next five years as organisations ramp spending to compete in their own markets, and Broadcom’s processors are well positioned to benefit.
PAUSE FOR THOUGHT
December’s sharp share price rally is a cause for investors to pause for thought, which may explain why it’s been a slow start for the stock in 2025, but we believe beyond that Broadcom’s AI kit is driving significant growth. Crucial to the stock’s performance over the coming months will be evidence that momentum is being maintained, such as last year’s Tomahawk and Jericho switching product launches, which could prove crucial to keeping its leadership in networking, for example.
Supply chain trips could undermine the stock, while there will always be regulatory scrutiny, and the European Commission is investigating the VMware acquisition, which could lead to penalties of some nature. A final fact to consider is Broadcom’s balance sheet. With its history of jumbo acquisitions, Broadcom doesn’t look like the rest of the big tech universe, which typically have large cash piles.
By contrast, Broadcom needs to service gigantic net debt of around $58 billion, yet equally it throws off enormous amounts of cash every year, $19.4 billion in fiscal 2024, demonstrating its ability to handle its financial obligations and invest in future growth.
Analysts see revenue growing incrementally to more than $80 billion by fiscal 2027, nearly 60% up on last year, based on Koyfin consensus, implying EPS (earnings per share) of $9.11, versus $4.87 last year. This makes its three-year average forward PE (price to earnings) multiple of 31 and 1.3 average PEG (price to earnings growth) look attractive in our view. In short, Broadcom provides crucial kit right across the tech sphere, presenting decent defensive moats to its revenues. It is also enjoying strong AI momentum but from a diversified portfolio.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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