Broadcom (NASDAQ:AVGO) has soared by over 75 percent over the last year, breaking into the trillion-dollar valuation range and attracting several large and prominent investors in the process.
The company’s success has been powered by ongoing demand for AI infrastructure, especially the application-specific integrated circuit, or ASIC, chips in which Broadcom specializes.
Let’s dig into Broadcom’s performance and outlook to see where the stock could go over the next five years.
Almost 50 Quarters of Top Line Growth
With 48 consecutive quarters of revenue growth under its belt, it’s safe to say that Broadcom has been turning in strong performance over many years. This streak extended in Q1 when management reported year-over-year revenue growth of 25 percent to $14.9 billion.
Earnings per share, meanwhile, rose from just $0.28 in the year-ago quarter to $1.14. Free cash flow also surged from $4.7 billion to $6.0 billion over the same period. Turning to its profitability metrics, Broadcom has delivered a net margin of 22.6 percent over the last 12 months.
Broadcom also has a respectable balance sheet that gives it the latitude to invest in new R&D while also buffering it against macroeconomic volatility. Reserves of cash and cash equivalents exceeded $9 billion at the end of Q1.
While its long-term debt is a bit high at over $60 billion, the leadership team has been aggressively paying down that debt since it peaked at over $73 billion less than two years ago.
What Is The Future For Broadcom Shareholders?
In addition to the very strong numbers the company has delivered up to now, it could have room for considerable growth ahead.
With the market for AI chips still white-hot, the companies that come to dominate that market are set to see years of remarkably strong demand. Though Broadcom isn’t in a position to defeat NVIDIA as a supplier of mass-produced AI chips, its more specialized chips could still have enormous value.
By 2030, the market for AI inference chips, a leading use of ASICs, is expected to surpass $90 billion. As Broadcom builds its business as a manufacturer of workflow-specific chips, the semi firm will likely see extremely strong growth in both revenues and earnings. This is reflected in the projection for 5-year annualized EPS growth, which currently stands at about 23 percent.
Broadcom is also expanding its AI capabilities, something that will likely drive continued revenue and earnings growth.
Recently, for example, the company released its Tomahawk 6, a faster chip that promises to support the needs of larger data centers that will drive more complex AI models as they develop.
This strategy of developing high-speed, efficient chips could help Broadcom stay relevant in a market otherwise dominated by NVIDIA’s GPUs.
Broadcom’s Valuation Is Quite High Right Now
Broadcom’s impressive performance and opportunities for future growth have driven it to trade at 92.5 times earnings and 20.7 times sales.
While high multiples for companies leading the way in AI are far from unusual, investors may be somewhat wary of a P/E that’s flirting with triple-digit territory.
The good news, however, is that Broadcom’s strong projected earnings growth over the next five years could justify its currently high valuation.
Most analysts remain fairly optimistic about Broadcom’s near-term performance. Institutional investors have also bought about double the amount of Broadcom that they’ve sold over the last six months, suggesting that Wall Street also sees continued upside for the stock.
Is Broadcom at Risk of Competition From NVIDIA?
One thing that investors may want to look at when it comes to Broadcom is the fact that NVIDIA is making its own inroads into the ASIC chip space.
Earlier this year, it was reported that NVIDIA was building an ASIC department in hopes of staking out a position to compete with Broadcom and other ASIC majors. While Broadcom still has a fairly solid early lead on NVIDIA, the risk that the larger company could catch up over time is worth taking into account.
Where Will Broadcom Stock Be in 5 Years?
The consensus price target for AVGO is $276.58, a price that would result in a 12 percent upside from the most recent closing price of $246.93.
Even with a rather steep valuation and possible competition from NVIDIA, there’s a great deal to like about Broadcom as a business in the long run. The company’s early lead in ASIC chips and the ongoing growth in demand for AI infrastructure will likely keep it growing briskly for many years to come. If the company can hit the earnings growth rates expected from it, it may be able to justify its very high valuation multiples.
Even leaving room for P/E contraction, a highly probable outcome as a ratio of over 90 times earnings would be extremely difficult to maintain, AVGO could rise significantly over the coming five years.
Conservatively assuming that Broadcom markedly undershoots its current course and earns around $4 per share this year, a 20 percent earnings growth rate over the next five would result in eventual earnings of almost $10.
At that point, the stock’s P/E ratio could contract by nearly half and still see the stock roughly double to the range of $500 per share. It’s also worth reiterating that this is a fairly conservative case, as most analysts project total EPS of over $6 this year.
A final piece of Broadcom’s picture from an investor’s perspective is the company’s modest dividend. Right now, Broadcom yields 0.9 percent, paying $2.11 per share annually. With the earnings growth that could occur over the next several years, though, Broadcom could have real potential as a dividend growth stock.
Although Broadcom’s sky-high P/E could work against it, there still seems to be room for AVGO to beat the market’s average performance over the coming five years. With AI still being a young technology, companies like Broadcom are likely to be in for significantly more than five years of strong earnings growth.
This means that there could still be considerable room to price in higher EPS. While Broadcom likely won’t deliver the kind of returns going forward that it has over the past year, there still appears to be respectable long-term upside in AVGO.
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.
