3 Reasons to Buy Broadcom Stock Like There’s No Tomorrow

Investing in artificial intelligence may feel a little wild right now. So much is changing, and many tech companies that weren’t formerly in the AI space have pivoted to the market (or at least tried to).

But there’s one company that is seemingly making the right moves in AI right now, benefiting from a unique niche in the market, and has the potential to continue tapping into AI in the years ahead.

Here’s why Broadcom (AVGO 2.20%) could be a great addition to your portfolio.

1. It’s tapping into a massive AI market

Everyone who’s been following along at home knows that Nvidia is the leader in AI graphics processing chips. However, within the broader AI chip market, there are niches, including application-specific integrated circuits (ASICs), that are up for the taking.

This is where Broadcom has focused its attention lately. The company already makes the leading ASICs used by companies needing general-purpose AI chips (think big tech companies like Alphabet and Meta), and is attracting a growing list of customers in an expanding market.

Because of Broadcom’s early moves in this space, J.P. Morgan estimates the company’s custom AI chips have a total addressable market of $150 billion over the next four to five years.

2. AI chip customers keep coming back

Broadcom isn’t just waiting for the large total addressable market to help boost revenue one day; it’s already benefiting from it. Sales of the company’s AI-focused chips more than tripled in the second quarter, reaching $3.1 billion.

Not only is that phenomenal year-over-year growth, but considering that total revenue in the quarter was $13.1 billion, Broadcom’s AI sales accounted for an impressive 24% of the company’s sales in the quarter.

Chip customers keep returning to Broadcom, and CEO Hock Tan said on the earnings call that “customers continue to scale up and scale out their AI clusters,” and that custom AI accelerator demand continues to grow.

The increasing demand for its AI products prompted Broadcom’s management to raise its artificial intelligence revenue estimates for 2024 from the previous $11 billion to $12 billion.

Image source: Getty Images.

3. Its stock is cheaper than some rivals

Admittedly, Broadcom’s stock isn’t cheap. But compared to Nvidia and even AMD, it’s slightly cheaper.

Broadcom’s current forward price-to-earnings ratio is 27, while AMD’s is 28 and Nvidia’s P/E ratio is a whopping 42. For investors looking for a better deal than some other AI chip plays, Broadcom is about as good as you’re going to get.

Broadcom’s share price dipped after the company reported its third-quarter results because fourth-quarter guidance was a little lower than analysts’ estimates. With shares down about 6% over the past three months, now could be a good time to buy the stock. Just keep in mind that AI stocks can be volatile, so expect some price swings along the way.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, JPMorgan Chase, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.