Broadcom: An AI Leader with Immense Growth Potential
Broadcom (AVGO) has emerged as a frontrunner in the artificial intelligence (AI) landscape. However, the market may not yet fully appreciate the magnitude of the opportunity that lies ahead for this growth stock in the coming years. Broadcom has strategically positioned itself as the preferred partner for companies seeking to design their own custom AI chips, rather than relying solely on graphics processing units (GPUs).
This setup provides the company with a clear pathway to growth, potentially driving the stock significantly higher. But what makes Broadcom so special?
What Makes Broadcom Special?
Broadcom operates in two distinct segments: semiconductor solutions and infrastructure software. The semiconductor unit is further divided into two primary areas:
* Networking Gear: Networking has long been a core business for Broadcom. Their networking equipment, including Ethernet switches and optical components, is crucial for facilitating the rapid and efficient transfer of massive datasets within data centers. Unsurprisingly, networking components have become even more critical with the rise of AI, as AI workloads demand high throughput and low latency. This has proven to be a thriving business for the company.
* Application-Specific Integrated Circuits (ASICs): Broadcom has a long history of assisting customers in designing application-specific integrated circuits (ASICs). Unlike traditional chips that can be programmed for various tasks after manufacturing, ASICs are custom-built for specific functions and cannot be reprogrammed. This specialization generally results in greater power and efficiency for the intended tasks. With the surge in AI adoption, customers are increasingly turning to Broadcom for help in designing custom AI chips.
Broadcom also boasts a substantial infrastructure software business, built through acquisitions like CA Technologies, Symantec, and VMware. VMware stands out as the crown jewel, a market leader in virtualization that enables multiple virtual machines to run on a single server, thereby reducing customer costs. The VMware Cloud Foundation platform is also benefiting from the AI buildout, allowing enterprise customers to manage AI workloads across public clouds and their own on-premise data centers. This prevents vendor lock-in, ensuring flexibility in their cloud computing strategy.
The Biggest Opportunity: Custom AI Chips
While various Broadcom businesses benefit from the AI revolution, the most significant opportunity lies in custom AI chips. As demand outpaces supply, the cost of Nvidia's GPUs has skyrocketed. Hyperscalers (owners of large data centers) are actively seeking more cost-effective and efficient ways to perform inference at scale. Unlike training, which is a one-time event, inference runs continuously, meaning that the cost savings from a well-designed custom chip can compound over time.
Broadcom has already demonstrated its capabilities by collaborating with Alphabet to develop their tensor processing units (TPUs), which now power Google Cloud. This success paved the way for new customers like Meta Platforms and ByteDance, both of whom are developing their own chips with Broadcom's expertise.
The company recently surprised investors by revealing that a fourth major customer, widely believed to be OpenAI, has placed a substantial order for the coming year. This underscores Broadcom's ability to rapidly transition from design to production and highlights the strong demand for alternatives to general-purpose GPUs. OpenAI is also planning a massive data center expansion with Oracle over the next few years, potentially creating significant upside for Broadcom. Additionally, reports suggest that Apple is developing its own AI chips with Broadcom, potentially becoming another major customer.
Where Could the Stock Be Headed in 2026?
Analysts forecast that Broadcom will generate $63.3 billion in revenue in fiscal 2025, which concludes in early November. The company's statement that its first three AI chip customers represent a serviceable market opportunity of $60 billion to $90 billion in fiscal 2027, coupled with OpenAI's (presumed) $10 billion order for fiscal 2026, indicates a massive opportunity. This excludes the distinct possibility of Apple becoming a revenue-generating AI customer by fiscal 2027.
Given this momentum, it wouldn't be surprising to see Broadcom double its revenue over the next two years, reaching approximately $127 billion in fiscal 2027. Custom chips often command higher gross margins, so let's assume a slight increase to 80% for the adjusted gross margin, while adjusted operating expenses rise moderately to around $9 billion. Applying a 20% tax rate would result in a net income of approximately $74 billion, or about $14.80 per share, based on the current share count (5 billion diluted shares).
Applying a forward price-to-earnings (P/E) multiple of 30 to 40 to $14.80 in fiscal 2027 EPS could value the stock between $445 and $600 per share by the end of 2026. While this multiple may seem high, it reflects the anticipated future growth as custom AI chip customers continue to increase.
This represents a potentially strong 70% upside for the stock over the next year or so.
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