Broadcom (AVGO) thrives on growing AI business. Is the stock a buy?

Broadcom, Inc. (NASDAQ: AVGO), a leading provider of semiconductor solutions for wired and wireless communications, recently impressed the market with upbeat financial outlook highlighting strong prospects for its AI business through 2027.

After the company reported earnings recently, the stock has outperformed market leaders like Nvidia, which has been the top performer for quite some time. The post-earnings rally drove AVGO to a record high of $250. Having gained a whopping 45% in the past 30 days alone, the stock still has room for growth as the tech firm continues expanding its AI business.

Strong Q4

In the fourth quarter of 2024, Broadcom’s earnings, excluding one-off items, were $1.42 per share, compared to $1.11 per share in the corresponding period a year earlier. On an unadjusted basis, net income rose to $4.32 billion or $0.90 per share in the fourth quarter from $3.52 billion or $0.83 per share in the prior-year quarter.

The bottom-line growth was driven by a 52% surge in Q4 revenues to $14.1 billion from $9.3 billion last year. Semiconductor Solutions revenue rose 12% annually, while Infrastructure Software revenue more than doubled. In a recent statement, the management said it expects a double-digit revenue increase for the first quarter of 2025.

The upbeat investor sentiment reflects the growing demand for Broadcom’s advanced AI XPUs and Ethernet networking portfolio. Meanwhile, the company has launched next-generation XPUs — in three nanometers — and is preparing to start volume shipment to its hyper-scale customers in the second half of fiscal 2025.

AI Leads

Broadcom is probably at the threshold of a major boom because hyperscalers working on their own AI chips would need the company’s semiconductor solutions like high-performance Ethernet switches and custom AI chips. It is estimated that each of the company’s three hyper-scale customers will deploy one million extreme processing unit clusters in 2027, representing an AI revenue serviceable addressable market for such chips in the range of $60 billion to $90 billion.

Elaborating on the outlook, Broadcom’s CEO Hock Tan said in the Q4 2024 earnings call, “We are very well positioned to achieve a leading market share in this opportunity and expect this will drive a strong ramp from our 2024 AI revenue base of $12.2 billion. Keep in mind though, this will not be a linear ramp. We’ll show quarterly variability. To compound this, we have been selected by two additional hyperscalers and are in advanced development for their own next-generation AI XPUs. We have line of sight to develop these prospects into revenue-generating customers before 2027 and could therefore expand the SAM significantly.”

The 52-week average price of Broadcom’s stock is $150.18. The shares were trading up 2% on Tuesday afternoon, after opening the session at $232.35.