Is Broadcom the Under-the-Radar AI Semiconductor Stock to Buy in 2024? – The Motley Fool
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Is Broadcom's surprising AI edge worth a premium share price? Let's unpack its investment appeal for the long haul.
Everybody knows Broadcom (AVGO 6.18%) as a giant in the semiconductor industry. With a $583 billion market cap and annual revenues of $35.8 billion, the company stands shoulder to shoulder with household names like Intel and Nvidia.
Best known for making chips that move data through many kinds of networks and systems, you might not think of Broadcom as a play on the artificial intelligence (AI) boom. As it turns out, Broadcom’s networking solutions play a crucial role in large-scale AI systems. In particular, generative AI tools such as OpenAI’s ChatGPT and DALL-E 3 accounted for 15% of Broadcom’s chip sales last year — with an even higher target in 2024.
Does the rapid growth in AI-related sales make Broadcom a no-brainer buy in 2024? Let’s take a look.
Generative AI systems contribute to Broadcom’s financial results in two ways.
First, the company’s high-speed Ethernet networking solutions help a generative AI platform’s back-end training systems access and process enormous volumes of data at lightning speed. These systems are composed of dozens, hundreds, or even thousands of number-crunching processors, shuffling data between them at breakneck rates.
Second, Broadcom also designs custom chips, known as application-specific integrated circuits (ASICs), to tackle incredibly specific computing tasks. In this segment, the company only has one AI customer worth mentioning — but it’s a huge one.
Broadcom has co-designed and supplied tensor processing units (TPUs) for Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Cloud division since 2015, and these chips specialize in training generative AI systems. Without Broadcom’s solutions, Google wouldn’t have the Gemini (formerly called Bard) AI platform to challenge OpenAI’s early chatbot dominance.
Together, Broadcom classifies the AI ASICs and AI-focused networking solutions as AI accelerators. These sales added up to 15% of last year’s semiconductor revenues, or approximately $4.2 billion.
And demand for these AI accelerators is only growing. In 2024, CEO Hock Tan expects generative AI systems to become even more important, saying on December’s fourth-quarter earnings call:
In fiscal 2024, we expect networking revenue to grow 30% year on year, driven by accelerating deployments of networking connectivity, an expansion of AI accelerators in hyperscalers. We expect revenue from generative AI to represent more than 25% of the semiconductor revenue.
Generative AI is far from the only iron in Broadcom’s fires, of course. The company recently closed the $61 billion acquisition of virtual computing expert VMware, laying the groundwork for a comprehensive IT infrastructure business. The company is going through a downturn in broadband and wireless equipment orders from North American telecom and connectivity giants, but the lightening inflation pressure should soon release fresh demand in this crucial market.
Broadcom’s strategic focus on AI accelerators, especially in the realm of generative AI, reflects a savvy pivot toward high-growth technological areas. With AI-related revenues poised to climb to over 25% of its semiconductor sales, the company is not just responding to market demand but is actively shaping the future of AI infrastructure.
This foresight, coupled with strategic expansions like the ambitious VMware acquisition, suggests that Broadcom is not only a leader in today’s tech landscape but also a visionary force in the evolving digital world.
The stock isn’t exactly cheap after doubling in 52 weeks, priced at a lofty 16.5 times sales today. But you get what you pay the premium for: a visionary innovator with its finger on the digital pulse.
For investors with an interest in the tech sector’s long-term future, Broadcom looks like a solid investment, pairing current performance with market-defining authority and future potential. It’s not exactly the clearest no-brainer buy in this market, but more of a robust AI bet for patient investors.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Intel, and Nvidia. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
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