Why this stock could be the next AI winner.
If you invested just $10,000 in Broadcom (AVGO -3.03%), then known as Avago Technologies, right after it went public in 2009, and never sold any shares, that alone would have significantly reduced your $1 million investment. You’ll be getting closer. It’s been 15 years.
Broadcom may not make similar profits over the next 15 years, but this stock still has the potential to make you a billionaire.
The next big AI winner
While rival Nvidia is the biggest beneficiary of early artificial intelligence (AI) infrastructure buildouts, Broadcom could very well be the next big AI winner. However, that doesn’t mean the company isn’t still doing well in this area.
For example, the company continued to revise its AI revenue forecast upward throughout the year. Last fall, the company expected AI revenue to be about $7.5 billion in 2024, but later raised that to $10 billion and then $11 billion. After the most recent quarter, the company raised its AI revenue forecast to $12 billion.
The company participates in building AI datacenter infrastructure in two main ways: network components and custom chips.
On the networking side, the company designs a number of components used to build graphics processing unit (GPU) clusters. A GPU cluster is a group of interconnected computers that work together as a single system with a GPU on each node (individual server). within a cluster). These supercomputer GPU clusters are used to train AI Large-Scale Language Models (LLMs).
GPUs are getting a lot of attention as the number of GPUs being incorporated into these clusters continues to grow, but they are not the only component needed. On the Broadcom side, we provide the switches and network interface cards (NICs) needed to build these clusters. Switches allow two or more devices to communicate directly with each other, helping manage data flow and avoiding network congestion. A NIC, on the other hand, is required to connect your computer to a network and allow it to communicate with other computers on the network.
As the number of GPUs increases, the cluster size continues to grow exponentially. Broadcom believes this growth will create challenges for distributed computing, with Ethernet switches becoming central to processing AI workloads and transferring data between GPUs.
Broadcom is not without competition. Nvidia offers a competing switching technology to Ethernet called InfiniBand, which it acquired as part of its Mellanox acquisition, while Intel is developing a technology called Omni-Path. Broadcom said it believes all hyperscalers will be using Ethernet by the first half of 2025.
But perhaps an even bigger opportunity for Broadcom is through the design of custom AI chips (application-specific integrated circuits, or ASICs) for customers.
Our first customer in this space was Alphabet, where we helped them create tensor processing units for their AI workloads. It added two more customers this year, believed to be Metaplatforms and China’s ByteDance, owner of TikTok. There are also reports that OpenAI is in talks with Broadcom to build its own custom AI chips.
Broadcom’s ASICs allow customers to customize chips to meet their specific computing and power needs. This is a huge and growing market, and Broadcom is a leader in the ASIC space. As AI capital expenditure (capex) budgets increase, Broadcom is well-positioned to acquire custom AI chips that could be the next step in building out AI infrastructure.
Image source: Getty Images.
Is it time to buy stocks?
Broadcom appears to be in the early stages of the custom AI chip revolution. This has the potential to be a huge market, and the company is a leader in the ASIC space.
From a valuation perspective, the company currently trades at around 26x forward price-earnings (P/E), based on next year’s analyst forecasts. This is not an expensive valuation, considering the growth opportunities ahead of the company.
AVGO PE Ratio (Forward 1y) data by YCharts.
If Broadcom can leverage its custom AI chips and advanced networking opportunities, this stock has the potential to become the next big AI winner and make you a billionaire.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Geoffrey Seiler holds a position at Alphabet. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
