Semiconductor makers have been big winners in artificial intelligence, but not all chip businesses have enjoyed the same level of success.
When it comes to semiconductor stocks and data center businesses, I’d wager that companies such as Nvidia and Advanced Micro Devices come to the top of your mind. The thing is, there’s a whole lot more than just those two juggernauts when it comes to emerging opportunities in AI-powered chips and infrastructure solutions.
Broadcom (AVGO 5.25%) is a company that is often featured in the AI narrative, but I wouldn’t be surprised if you’ve overlooked the company’s progress.
Let’s take a look at Broadcom’s business and explore how the company is quietly building an influential operation in AI. After assessing the company’s roadmap, investors may come to see why now could be a lucrative opportunity to buy Broadcom shares.
What does Broadcom actually do?
Broadcom is not the easiest business to understand. The company has 26 divisions spanning various semiconductor and infrastructure solutions. Some of Broadcom’s services include network connectivity chips used in data centers, server storage, broadband and wireless products, cybersecurity, and cloud computing.
Although Broadcom’s semiconductor use cases play similar roles to its chip counterparts, the company’s growth has yet to show comparable levels of success. I think that is about to change, and a close look at Broadcom’s investments should help shed some light on where the company is headed.
Image source: Getty Images.
How is Broadcom ramping up its AI business?
Broadcom bifurcates its reported revenue into two categories: semiconductor solutions and infrastructure software.
On Sept. 5 the company published earnings for the fiscal third quarter of 2024, ended Aug. 4. Broadcom generated $13.1 billion of revenue in the quarter, up 47% year over year. That looks pretty solid, right? Well, unfortunately there is more here than meets the eye.
Back in November, Broadcom closed on its acquisition of cloud architecture software company VMware. If I exclude the financial contribution from VMware in the figures above, Broadcom’s organic growth was actually only 4% year over year.
On top of that, the company’s largest source of revenue — semiconductor solutions — only grew 5% year over year during the latest quarter. Essentially, VMware’s impact on the infrastructure software segment accounts for the lion’s share of Broadcom’s growth right now. That does not bode well. But don’t worry, there’s reason to believe Broadcom’s business is about to be supercharged.
For starters, the company’s non-AI businesses look ready to turn things around. During the earnings call, Broadcom Chief Executive Officer Hock Tan said that “non-AI semiconductor revenue has stabilized” and that management is “expecting a recovery” starting next quarter as the non-AI segments have bottomed.
Moreover, Tan also said that revenue from AI products will drive $12 billion in annual sales this year — up from the prior company estimate of $11 billion. I see the turnaround in the non-AI businesses in conjunction with the ongoing integration of VMware as a compelling narrative supporting Broadcom’s revamped look as a leading AI chip and cloud software enterprise.
A look at Broadcom’s valuation
At the time of this writing, Broadcom trades at a forward price-to-earnings (P/E) multiple of 22.8. This is materially lower than Nvidia’s forward P/E of 36.6 and a few notches below AMD’s forward P/E of 25.2.
What’s more is that even though shares of Broadcom are up roughly 23% so far in 2024, they’ve actually been little changed during the past six months and have fallen during the past month.
I don’t think investors have soured on Broadcom, but the sentiment isn’t overly positive either. To me, the discount in Broadcom’s valuation multiples compared to other leading semiconductor stocks coupled with some recent price moves just suggests that the outlook for the company isn’t as bullish compared to its cohorts.
Ultimately, I think the disparity between Broadcom and other opportunities in the chip market is misguided. While the company is largely relying on VMware to drive growth right now, Broadcom has opportunities to parlay this asset into many other avenues touching chips and software at the intersection of AI. I see Broadcom in the very early stages of becoming a powerhouse in the AI landscape and think the stock is a good buy right now for investors with a long-term time horizon.
Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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