Category-leading semiconductor and software companies are experiencing strong growth with next-generation AI.
While industrial and oil companies once held the top tier of business valuations, that is no longer the case. For example, in 2004, General Electric and ExxonMobile were the world’s largest companies as measured by market capitalization, with values of $319 billion and $283 billion, respectively.
But over the past two decades, views have changed and the charts have become dominated by the world’s most famous technology companies. With Apple, Nvidia, and Microsoft all valued at more than $3 trillion, the battle between the top three continues to intensify, but the top spot has changed hands several times this year. Three other technology-focused companies with membership in the $1 trillion club are Alphabet, Amazon, and Metaplatforms, valued at $2 trillion, $1.9 trillion, and $1.5 trillion, respectively.
Broadcom (AVGO -2.27%), with a market cap of about $818 billion (as of this writing), is in the top 10 and seems destined to join this exclusive fraternity. The company has a unique position in artificial intelligence (AI) infrastructure, and accelerated adoption of this breakthrough technology could help Broadcom secure membership in the $1 trillion club sooner than expected It may be possible.
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side of chips
Broadcom is responsible for a wide range of semiconductor, software and security solutions spanning all aspects of the cable, broadband, mobile and data center sectors. In fact, management estimates that “99% of all Internet traffic goes through some type of Broadcom technology.” As such, the company is playing a key role in the rapid adoption of AI. That’s because its vast collection of technologies forms the necessary foundation for generative AI, which primarily operates in data centers and the cloud.
With Broadcom’s acquisition of VMWare late last year, there’s also a big opportunity at hand. Management continues to work overtime to convert VMWare’s products to a subscription licensing model, which will ultimately increase recurring revenue. Broadcom could also benefit by cross-selling these products to existing customers, a process that is already moving quickly.
The results show that business is strong. Broadcom’s fiscal third quarter (ending Aug. 4) had revenue of $13.1 billion, an increase of 47% year over year, and adjusted earnings per share (EPS) of $1.24, an increase of 18%. Management expects strong growth to continue and raised its full-year sales forecast to $51.5 billion, representing 44% growth.
The company’s consistently strong performance and soaring stock price convinced Broadcom management to pursue a 10-for-1 stock split, which was completed in mid-July.
The road to $1 trillion
The widespread adoption of Broadcom’s chips and accessories, a critical component of data center operations, gives the company an edge in the AI revolution.
According to Wall Street estimates, Broadcom is expected to generate $51.61 billion in revenue in 2024, giving the company a forward price-to-sales (P/S) ratio of nearly 16 times. If the stock’s P/S remains constant, Broadcom should: It generates approximately $63 billion in annual sales to support a $1 trillion market capitalization.
Analyst consensus forecasts are for revenue growth of 44% in 2024 and 14% in 2025. If the company achieves these goals, it could reach a market capitalization of $1 trillion as early as 2026. Additionally, these forecasts may become conservative as the rapid adoption of AI raises growth forecasts.
This evidence suggests that Broadcom could join the ranks of the billionaires sooner rather than later. Management noted that infrastructure software revenue surged 200% in the third quarter, and the company expects AI-related revenue to grow to more than $12 billion this year, which is higher than its fiscal year expectations. That’s 23% of revenue.
It is still too early to tell how big the market for generative AI will be, but estimates continue to rise gradually. According to global management consulting firm McKinsey & Company, the economic value of generative AI is expected to reach between $2.6 trillion and $4.4 trillion annually over the next 10 years. If you include revenue generated from embedded software, that number doubles.
Broadcom’s strong performance and the excitement surrounding the stock split helped fuel the stock’s jump, resulting in a commensurate increase in valuation. The stock is selling for 36 times forward earnings, compared to the S&P 500’s 28 times.
But Broadcom stock is up 10,720% since 2009, more than 22 times the S&P’s return of 471%, showing why the premium is justified.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Danny Vena has held positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
