Broadcom (NASDAQ:AVGO) is well-known as a leader in 5G semiconductors, but it’s also a chip stock that lags behind many of the top names in this sector — most notably Nvidia (NASDAQ:NVDA).
The company powers the sort of data throughput and connectivity we all rely on with its advanced chips and RF solutions. In 2023, the company’s 5G and AI revenues hit $5.9 billion and $4.2 billion, respectively, out of $28.2 billion total income.
Notably, Broadcom stock has been on a tear of late, nearly doubling over the past year on strong investor demand. Some of this is due to the company’s recent 10-for-1 stock split on July 15, which reduced its share price from $1,600 to $170. Market analysts like those at JPMorgan believe Broadcom has strong growth potential in the semiconductor space due to AI. Aside from that, its cybersecurity capabilities are also strong due to the merger with Symantec and Carbon Black. Of 46 analysts, 83% rate Broadcom stock a buy.
The question is whether now is the right time to build a position in this chip name, particularly after its recent run. Let’s dive into what to make of this move, and where AVGO stock could be headed from here.
Talks with OpenAI
OpenAI has explored developing its own AI chip, discussing plans with chip designers like Broadcom. The aim of this strategic review is to integrate hardware and software efficiently and address AI chip shortages. The company is recruiting former Google employees for their expertise in Tensor processors. However, the report notes that matching Nvidia’s AI server chips would require years of R&D.
OpenAI aims to expedite AI chip development by leveraging former Google experts. CEO Sam Altman wants to raise as much as $7 trillion to transform the semiconductor industry and advance AI, boosting global services and value.
If this deal does go through, and Broadcom does play a pivotal role in driving chip design for various AI players, the narrative could completely shift in this sector. That’s more of an outsized probability but it’s one I think investors are starting to at least price in right now.
Broadcom Has Strong Growth Potential
Broadcom excels in data-center networking chips, with an 80% market share, leading in providing high-end ASICs for AI players. The company co-designs custom machine learning chips with Alphabet (NASDAQ:GOOG, GOOGL) and Meta Platforms (NASDAQ:META), and could add Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL) as a third major client.
Broadcom’s Q2 revenue surged 43% to $12.5 billion, driven by record AI sales, with net income rising 20% to $5.4 billion. Analysts view Broadcom, alongside Nvidia, as essential to AI infrastructure, expecting 21% annual earnings growth through 2026. Despite a valuation of 36 times adjusted earnings, long-term investors might find it worthwhile to consider this chip name, particularly if its growth rate remains high or accelerates further from here.
Moreover, Broadcom’s ASICs rival Nvidia’s GPUs in AI data centers. Analysts view this as a matchup of different strengths, with Broadcom’s open standards competing against Nvidia’s mixed approach. Broadcom’s strategy is favored by hyperscaler cloud firms, network equipment makers and Advanced Micro Devices (NASDAQ:AMD).
The 10-for-1 Stock Split Difference
Good investments often feature competitive advantages and growth potential, leading to significant share-price gains and stock splits. Research from Bank of America shows that stocks typically outperform the S&P 500 by 13% in the year after a split announcement. Broadcom’s stock price did drop following its 10-for-1 stock split briefly but certainly could have more upside if these trends hold.
I’m of the view that as Broadcom’s investor base widens and more institutional investors add to their positions, this is a stock that could ride its tailwinds higher through the end of the year. While a stock split does nothing to affect a company’s underlying fundamentals, it is something long-term investors should pay close attention to over the near term.
As a trade, I think Broadcom stock is well-positioned for more upside from here.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
