How Broadcom (AVGO) Became an AI Giant
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Broadcom (AVGO) just dropped a bombshell on Wall Street. The company expects its AI business to hit a serviceable addressable market of $60-90 billion by 2027, up from just $15-20 billion today, a 55% CAGR. While financial pros focused more heavily on Nvidia (NVDA) and Advanced Micro Devices (AMD), according to our TrackStar data, Broadcom’s latest earnings revealed something far more interesting – the transformation of a semiconductor stalwart into an AI powerhouse. CEO Hock Tan laid out a clear vision of the company’s future, one where artificial intelligence drives the majority of semiconductor growth. Enthralled with his outlook, investors sent shares soaring 25%, tacking on another 7% on Monday. Here’s our analysis of this rapidly evolving story. Broadcom’s Business Broadcom has morphed from a simple chipmaker into a technology powerhouse that spans semiconductors and infrastructure software solutions. The company designs and develops everything from networking chips that power data centers to the software that manages cloud infrastructure, serving customers from Apple to the world’s largest hyperscalers. The best way to think about it…if Nvidia’s chips are the heart and servers are the skeleton, Broadcom is the connective tissue. Broadcom segments its business into the following areas:
The company’s Q4 results showed consolidated revenue growing 51% year-over-year to $14.1 billion, with adjusted EBITDA reaching 65% of revenue. Broadcom’s AI revenue, which includes custom AI accelerators (XPUs) and networking, grew 220% year-over-year to $12.2 billion in fiscal 2024. The integration of VMware, acquired early in fiscal 2024, has exceeded expectations. The company achieved its three-year cost synergy target in just one year while maintaining VMware’s technology leadership in data center virtualization. |
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CEO Hock Tan’s strategic shift toward AI has positioned Broadcom as a key player in the development of custom AI accelerators and the networking infrastructure needed to connect them. Financials
Source: Stock Analysis Broadcom’s transformation shows up clearly in its financials. Revenue jumped 44% to $51.6 billion in fiscal 2024, with organic growth of 9% excluding VMware. The company’s margins remain robust, with a 76.9% gross margin in Q4, up 260 basis points from the previous year. This comes despite pressure from lower-margin AI accelerator chips. Operating cash flow reached $5.6 billion in Q4, while free cash flow hit $5.5 billion or 39% of revenue. This gives the company plenty of flexibility to both invest in growth and return capital to shareholders. The balance sheet carries $69.8 billion in gross debt, largely from the VMware acquisition. However, with $9.3 billion in cash and strong cash generation, Broadcom plans to actively pay down this debt in 2025. Valuation
Source: Seeking Alpha Broadcom trades at 46.3x, trailing non-GAAP earnings, slightly below Nvidia’s 51.3x but above AMD’s 42.3x. On a forward basis, its P/E of 57.5x reflects the market’s expectations for continued AI growth. At 52.6x trailing cash flow, Broadcom trades at a significant discount to AMD’s 97.0x while coming in just below Nvidia’s 55.8x. The company’s valuation appears quite reasonable given its strong AI positioning and growth prospects, especially when compared to AMD’s much higher multiple despite lower growth rates and margins. Growth
Source: Seeking Alpha Broadcom’s revenue growth of 44% year-over-year outpaces every competitor except Nvidia’s stunning 152.4% increase. Even looking forward, analysts expect 25% growth, significantly above Intel’s (INTC) projected decline and AMD’s 11.3% increase. The company’s three-year revenue CAGR of 23.4% demonstrates consistent execution, while its EBITDA growth of 27% year-over-year shows improving operational efficiency. Yet, the 55% projected CAGR through 2027 garnered the most attention. If true, it makes Broadcom shares incredibly cheap. Profitability
Source: Seeking Alpha Broadcom’s profitability metrics stand out in several areas. Its 75.2% gross margin nearly matches Nvidia’s 75.9% while far exceeding AMD’s 52.1% and Intel’s 40.1%. Most impressively, Broadcom’s free cash flow margin of 55.7% towers over Nvidia’s 36.9%, AMD’s 9.1%, and Intel’s (INTC) negative 17.3%. This exceptional cash generation efficiency stems from the company’s diverse revenue streams, strong pricing power, and steady cash flows from its infrastructure software segment.
Our Opinion 8/10 Broadcom has successfully transformed itself from a traditional semiconductor company into an AI powerhouse while maintaining industry-leading profitability. The clear visibility into future AI demand from hyperscalers, combined with the successful integration of VMware, positions the company for sustained growth. While the debt load from the VMware acquisition requires attention, strong cash flows and improving margins give us confidence in management’s ability to execute their vision. The stock deserves a premium valuation given its unique position in custom AI accelerators and networking, combined with a growing software business that provides steady cash flows. |
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