Many investors might think of Broadcom (NASDAQ: AVGO) as a dusty slow-growth chipmaker like Texas Instruments. However, Broadcom has gone through several major transformations since its founding in 1991, and it has outperformed a lot of other tech stocks over the past eight years.
On Feb. 1, 2016, Singapore’s Avago Technologies closed its acquisition of the original Broadcom and adopted the American chipmaker’s name. Two years later, the “new” Broadcom moved its headquarters from Singapore back to America. Its stock has rallied more than 700% since that takeover as the S&P 500 has risen about 150%.
Broadcom is now worth $519 billion, but could it double its market cap by 2030 to become another trillion-dollar chipmaker like Nvidia?
Broadcom has a history of inorganic growth
Prior to buying Broadcom, Avago had already acquired a long list of smaller companies to expand its portfolio of wireless, optical, and data storage chips. By paying $37 billion for Broadcom, it gained even more mobile, networking, wireless, and industrial chips. That inorganic growth strategy made it one of the world’s largest chipmakers.
Broadcom subsequently expanded into the infrastructure software market by buying CA Technologies in 2018, Symantec’s enterprise security division in 2019, and the cloud software giant Vmware in 2023. Those acquisitions should diversify its business away from the cyclical semiconductor market and curb its dependence on Apple, which still accounted for 20% of its revenue over the last two fiscal years.
From fiscal 2016 to fiscal 2023 (which ended last October), Broadcom’s adjusted revenue grew at a compound annual growth rate (CAGR) of 15%, its adjusted gross margin rose from 60.5% to 74.7%, and its adjusted earnings per share (EPS) increased at a CAGR of 21%. For reference, Texas Instruments grew its revenue and EPS at a CAGR of 7% and 18%, respectively, from 2016 to 2022 — but analysts expect its revenue and EPS to decline 12% and 25%, respectively, in 2023.
The mathematical path toward a trillion-dollar valuation
Broadcom’s stock still looks reasonably valued at 24 times forward earnings and 10 times this year’s sales (which includes its acquisition of VMware) after its multi-year rally. Assuming its current valuations hold steady, it would need to grow its revenue and EPS at a CAGR of about 10% to nearly double its market cap to $1 trillion by 2030.
That goal seems fairly achievable. From fiscal 2023 to fiscal 2026, analysts expect its revenue to grow at a CAGR of 18% as its EPS increases at a CAGR of 16%.
That growth should be driven by three long-term catalysts. First, the expansion of the generative artificial intelligence (AI) market should spark stronger sales of its data center and infrastructure chips over the next few years. Second, its sales of chips to mobile and IT infrastructure customers should warm up again as the macro environment improves. Apple also signed a new “multibillion-dollar agreement” to buy Broadcom’s 5G radio frequency components and other wireless connectivity components for several more years last May, so it won’t lose its top semiconductor customer anytime soon.
Lastly, Broadcom’s infrastructure business should continue to expand as it profits from the secular expansion of the cloud and cybersecurity markets, which have generally been less prone to deep cyclical downturns than the semiconductor market over the past few years. It expects to generate roughly half its revenue from software following its acquisition of Vmware, and that percentage could continue rising as it acquires more software companies.
But don’t ignore Broadcom’s weaknesses
Broadcom’s stock could double by 2030, but investors shouldn’t overlook its two weaknesses. First, it accumulated a lot of debt as it expanded its business, and its high debt-to-equity ratio of 2.0 could limit its gains as long as interest rates remain elevated. Second, it’s increased its share count by 20% since its acquisition of the original Broadcom to fund its acquisitions and stock-based compensation. Texas Instruments reduced its share count by nearly 10% during the same period.
Broadcom’s aggressive expansion strategies have paid off so far, but it could reach a point where its reach exceeds its grasp and it “di-worsifies” its sprawling business. If that happens, investors will be a lot less forgiving of its rising debt and dilution.
It’s still a potential trillion-dollar stock
That said, I believe Broadcom’s strengths still outweigh its weaknesses. It’s repeatedly proven the bears wrong with its bold investments, it’s still growing rapidly, its stock is reasonably valued, and it pays a decent forward dividend yield of 1.9%. Those strengths could help it join the 12-zero club by the end of this decade.
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Nvidia, and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Will Broadcom Be a Trillion-Dollar Stock by 2030? was originally published by The Motley Fool
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