The emergence of artificial intelligence (AI) at the end of 2022 ignited a rapid surge for several leading tech companies, resulting in many new entrants joining the trillion-dollar valuation ranks. The "Magnificent Seven" stocks have become some of the most prominent examples of this movement.
These organizations are each dominant players within their industries and are leading the way in AI innovation. Over the last few years, they've also delivered some of the most reliable returns in the market.
Yet, it might come as a surprise to investors that Broadcom ( AVGO -5.90%) has actually surpassed all of the Magnificent Seven stocks in performance over the past year, with its shares climbing 90%. Moreover, recent updates from the company’s latest quarterly results point to even more potential upside ahead.
Let’s explore what’s driving Broadcom’s remarkable growth and why this momentum is likely to persist.
Image source: Getty Images.
An AI alternative
High-performance chips, especially the graphics processing units (GPUs) created by Nvidia ( NVDA -4.84%), have supplied the processing power that has enabled generative AI to thrive. While GPUs remain unmatched in delivering the computational strength needed for AI, they are not the only solution available.
Broadcom offers a wide range of Ethernet switching and networking solutions that are essential for data centers, where the majority of AI workloads are processed. However, the company’s greatest potential lies in its application-specific integrated circuits (ASICs).
These tailor-made AI accelerators, known as XPUs, are optimized for particular functions, resulting in greater energy efficiency. Although they lack the versatility of GPUs, many businesses are willing to make this trade-off due to the increasing energy expenses associated with AI implementation.
This strong demand was evident in Broadcom’s latest earnings report. For its fiscal third quarter, which ended Aug. 3, Broadcom posted record revenue of $15.9 billion, up 22% from the previous year, and adjusted earnings per share (EPS) of $1.69, a 36% increase. The company made it clear that AI was a major growth driver, with AI-related revenue jumping 63% year over year to $5.2 billion.
These results easily surpassed analysts’ expectations, who had forecast revenue of $15.82 billion and adjusted EPS of $1.66.
The company’s management also shared an outlook that indicates this could be just the start. Broadcom reported that demand from its top three hyperscale clients continues to rise. While the company hasn’t officially named these clients, it’s widely assumed they are Alphabet, Meta Platforms, and ByteDance, the parent company of TikTok.
During the earnings call, CEO Hock Tam stated, "We continue to gain share at our three original customers." He also raised the company’s growth forecast for its AI-focused business in the coming year, predicting growth will surpass the previously projected 50% to 60% for fiscal 2025.
Even more notably, Broadcom revealed it has secured a fourth major hyperscale client, which many analysts believe is OpenAI. The company has now classified this client as a "qualified customer" and has started producing "AI racks based on our XPUs."
This new development added $10 billion to Broadcom’s order backlog, bringing the total to $110 billion. Investors are also awaiting further news about another previously mentioned potential client, whose business could further enhance Broadcom’s prospects.
What's next for Broadcom?
Ben Reitzes, an analyst at Melius Research, believes the Magnificent Seven should be expanded to the "Magnificent Eight" to include Broadcom. He also predicts that Nvidia’s market share will gradually decrease, as he expects Broadcom to capture around 30% of the AI chip sector. Still, he anticipates both companies will benefit from the ongoing rapid adoption of AI.
It’s important to recognize that as Broadcom’s share price has nearly doubled in the past year, its valuation has also increased. The company’s price-to-earnings (P/E) ratio now stands at 88, which may appear high. However, the price/earnings-to-growth (PEG) ratio, which factors in Broadcom’s accelerating growth, is just 0.37—any value below 1 typically indicates an undervalued stock. Additionally, the stock trades at only 37 times next year’s projected sales, which is reasonable considering the scale of the opportunity.
With a proven history of expansion, an appealing valuation, and a strong position to benefit from the continued rise of AI, Broadcom stands out. That’s why, if I could choose just one $1 trillion company to invest in, Broadcom would be my pick.
