Should you invest into Broadcom?
Another Artificial Intelligence Stock Split Is Coming: Could Broadcom Be the Next Nvidia?
What is the Market Direction for Broadcom
Artificial intelligence (AI) is heralded as one of the most significant technological advancements. While it might be too early to fully gauge its impact, the commercial power of AI is already evident. Nvidia (NASDAQ: NVDA) has become one of the largest companies in the world, alongside Apple and Microsoft, thanks to its advancements in AI. This success led Nvidia to split its stock 10-for-1, making it more accessible to investors. Now, Broadcom (NASDAQ: AVGO), another company with significant AI involvement, is planning a stock split later this summer.
Impressive Revenue Growth, But Inflated by Acquisition
Broadcom's recent revenue growth has been impressive, especially after its acquisition of VMware, a leading cloud software company, for $69 billion in November 2023. This acquisition significantly boosted Broadcom's revenue. However, when excluding VMware's contribution, Broadcom's Q2 revenue growth stands at 12% year-over-year, which is less striking than the headline 43% but still substantial.
AI-Focused Business Drives Future Earnings
Broadcom's AI-focused business, particularly its PCIe and Ethernet technology crucial for AI server farms, is showing robust growth. Hock Tan, Broadcom's president and CEO, highlighted in the latest earnings release that AI product revenue hit a record $3.1 billion in the quarter. The company's AI segment and strategic acquisition of VMware have led Broadcom to raise its revenue guidance for this year to $51 billion, a 42% increase from 2023.
Valuation and Comparison with Nvidia
Broadcom's forward price-to-earnings (P/E) ratio is about 34, which is reasonable compared to big tech companies and significantly lower than Nvidia's 48. Despite this, Broadcom's growth prospects don't quite match Nvidia's. Nvidia's revenue growth is more organic and significantly higher. Consensus estimates suggest Nvidia will deliver more than twice Broadcom's revenue growth by the end of this fiscal year and the next. Nvidia also expects to operate with roughly 20% better margins this year than Broadcom.
Visionary Leadership and Market Position
Nvidia has demonstrated visionary leadership, particularly in pioneering AI. This factor, while difficult to quantify, may help Nvidia maintain its top position as the industry matures and competition increases. Broadcom, on the other hand, has a solid track record and optimistic prospects, but it may not rival Nvidia's growth and market dominance.
Investment Considerations
While Broadcom is a good investment with strong prospects, it may not become the next Nvidia. Investors should consider other opportunities that may offer higher returns. The Motley Fool Stock Advisor analyst team recently identified ten top stocks to buy now, and Broadcom wasn't on the list. Historically, recommendations like Nvidia have yielded substantial returns. For example, a $1,000 investment in Nvidia when it was recommended in April 2005 would be worth $757,001 today.
Conclusion
Broadcom's upcoming stock split and its AI-focused growth make it a compelling investment. However, compared to Nvidia, Broadcom's growth is less organic and more reliant on acquisitions. While Broadcom remains a strong investment, it may not reach the same heights as Nvidia. Investors should consider a diversified approach, including other top stock picks, to maximize returns.