Is Broadcom Stock Overvalued?

The semiconductor company Broadcom Inc. (NASDAQ:AVGO) is having a stellar time on Wall Street at the moment. The company is running hot on the heels of the undisputed chip giant NVIDIA Corporation (NASDAQ:NVDA). Recently, the company topped the $1 trillion market capitalization mark – currently, its market cap sits at $1.07 trillion.

Broadcom’s recent prowess has impressed investors, and the stock has received a boost in return. Over the past six months, it has gained close to 35% while the gains over the past five years were 600%. What has impressed investors recently is Broadcom’s hefty forecasts about the future.

After such a big run-up, is Broadcom still cheap or to be avoided?

Semi Sales Absolutely Soar

By now, it has become apparent just how important GPU-style chips have become for ambitious tech giants making a splash in AI. Powering future applications are chips, the new gold, a fact quite apparent from sales.

In the month of November last year, global semiconductor sales hit their highest at $57.8 billion, growing 20.7% compared to November of 2023. Sales in the Americas were up the highest compared to other regions. up by 54.9%.

These chips are the building blocks that make possible large language models (LLMs), which are, in turn, the essential components of artificial intelligence, Wall Street’s hottest buzzword. This has also led to the bombastic rise of chip companies to become billion-dollar and event trillion-dollar chip behemoths.

Rising Star Powering AI’s Revolution

Against this backdrop, Broadcom has a technology platform called 3.5D XDSiP that enables its consumers to develop next-generation custom accelerators (called XPUs). The company’s technology is one of the most advanced in providing this service.

This is the building block of the company’s bright forecast for the future, which led to the stock bounce. Broadcom CEO Hock Tan revealed that the company was looking at a revenue opportunity of $60 billion to $90 billion in 2027 due to AI, which is more than four times the current size of the market.

This could well become a reality because big tech firms are looking to diversify beyond NVIDIA chips, which are pricey and supply-constrained.

Chipmakers, in general, are sitting on hefty gains following the buildout of data centers by big many in the Magnificent 7. Of course, much of the gains expected from AI still have time to materialize but optimism alone has led to the market skyrocketing on the prospects of future profits.

The expectations are largely justified with Broadcom recently announcing two major hyperscaler customers. The number of these types of customers has a high likelihood of growing.

According to TD Cowen analysts, Broadcom is forecast to capture as much as $50 billion in AI sales based on the 70% market share it had estimated in 2024 out of the total 2027 opportunity. However, after this, analysts did issue a cautionary note that modeling the company’s market share was difficult because the serviceable market could include processors sold by NVIDIA.

Meanwhile, as generative AI takes the world by storm, OpenAI announced that it had partnered with Broadcom to develop its first in-house chip. So, helping companies diversify away from other popular chip providers for them to reduce costs may well become a big market opportunity for Broadcom.

Is Broadcom Stock Overvalued?

Broadcom is not overvalued in the assessment of the 38 analysts covering the stock who view 5.8% upside still to fair value of $238.21 per share.

On the earnings front, Broadcom has last reported its complete 2024 results for the fiscal year ended in November. Revenues climbed by 44% from the prior fiscal year to $51.6 billion. Management cited its integration of VMWare as a cause of this tailwind, which mainly manifested in the infrastructure software revenue, which grew to $21.5 billion.

What was especially noteworthy in its financial results was the massive gain in the AI segment, based on which Broadcom reported such stellar forecasts. Due to its popular AI XPUs and Ethernet networking portfolio, AI revenues grew by 220% year-over-year to $12.2 billion. The main beneficiary of this push was Broadcom’s semiconductor segment, which posted a record revenue of $30.1 billion.

The top line gains also meant more bottom-line gains for the company and, in turn, more cash. In the same fiscal year, the company posted a strong free cash flow, excluding restructuring charges, of $21.9 billion.

To keep shareholders please, the Board of Directors raised the quarterly dividend by 11% to $0.59 per share for fiscal year 2025. Summing up to an annual dividend of $2.36 per share (its 14th consecutive dividend raise since its 2011 dividend initiation), this yields 1.03% at prevailing prices.

The bottom line is Broadcom is in a good place right now and has the very real potential to challenge the absolute dominance of NVIDIA in the chip market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.