The Nasdaq Composite has repeatedly reached new heights in 2024, notching more than 110 new all-time highs. Its record run has been fueled by a string of encouraging developments. The accelerating adoption of artificial intelligence (AI) was the initial catalyst for the rebound, but investor sentiment has been buoyed by waning inflation, recent interest rate cuts, and the U.S. election results. The tech-focused index jumped 43% last year and is up roughly 30% so far in 2024 (as of this writing). Students of history will note that the rally will likely continue well into 2025.
Stock charts reveal that the current bull market kicked off in October 2022. While each upswing is different, history can provide context. Bull markets have historically run for more than five years, on average. We're a little over two years into the current run, which suggests it will likely continue next year. Furthermore, in years following gains of 30% or more, the Nasdaq has increased an additional 19%, on average, which suggests the coming year could be a good one for the market.
Investors have also embraced the renaissance of stock splits. This has them examining companies that have split their shares, as this is generally the result of a well-run company with strong sales and earnings growth. Such is the case with Broadcom(NASDAQ: AVGO). The stock has gained 98% so far this year and 2,100% over the past decade (as of this writing). This led to a 10-for-1 stock split, which it completed in mid-July.
Yet, despite its recent rally, there's reason to believe that Broadcom's impressive run will continue in 2025 and beyond. Read on to find out why.
Image source: Getty Images.
An assortment of growth drivers
Broadcom provides a vast array of semiconductor, software, and security products that supply the mobile, broadband, cable, and data center industries, yet many investors continue to underestimate its reach. Management estimates that "99% of all internet traffic crosses through some type of Broadcom technology."
That's just the beginning. Broadcom is comprised of "26 category-leading semiconductor and infrastructure software divisions," according to the company. Its semiconductor solutions are crucial components in the networking, server storage, broadband, wireless, and industrial arenas. At the same time, infrastructure software serves the mainframe, distributed, cybersecurity, storage area networking, and cloud infrastructure spaces.
Broadcom's massive reach gave the company a strategic advantage when generative AI went viral early last year. Many of its products are essential components in data centers, where most AI processing takes place.
One of the consequences of the rapid adoption of AI has been the scramble to upgrade data centers to handle the rigors of AI. Nvidia CEO Jensen Huang suggests that there will be more than $1 trillion in data center upgrades over the coming five years, with another $1 trillion spent to bring new data centers online. That represents a significant opportunity for Broadcom.
Earlier this year, recent Broadcom acquisition VMWare was recognized by Gartner's Magic Quadrant as a leader in software-defined wide area network (SD-WAN) for the seventh consecutive year, attesting to its critical place within the industry.
The results paint a picture
The results are compelling. For its fiscal fourth quarter (ended Nov. 3), Broadcom generated revenue of $14 billion, which jumped 51% year over year. Its adjusted earnings per share (EPS) of $1.42 climbed 31%. Management was clear that surging demand for AI was fueling the results. AI networking revenue soared 158% year over year, while sales of custom accelerators (XPUs) doubled, and revenue from connectivity products grew fourfold.
For the upcoming first quarter, Broadcom is guiding for $14.6 billion in revenue, ahead of Wall Street's expectations of $14.47 billion. Management is also guiding for continued margin expansion, which would raise adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to 66% of revenue, from 65% in Q4.
Looking further ahead suggests that its growth is poised to accelerate. Management is forecasting AI revenue of between $60 billion and $90 billion by fiscal 2027. When compared to the $12.2 billion in AI revenue it generated in fiscal 2024, that suggests growth of between 391% and 638% over the coming three years. The company also announced that it has added two new hyperscale customers -- not included in its projections -- which suggests its growth could be even more robust.
Wall Street is equally bullish. Analysts' average price target is roughly $234 (as of this writing), which represents potential upside of 6%. Additionally, of the 43 analysts who offered an opinion in December, 88% rate the stock a buy or strong buy, and none recommend selling.
However, Jefferies analyst Blayne Curtis is much more bullish than his Wall Street colleagues. Just this week, he increased his price target to $300, which represents potential upside for investors of 36%. He's particularly excited about the opportunity involving application-specific integrated circuits (ASICs), which he believes will play a growing role in AI. He goes on to note that Broadcom is "uniquely positioned with AI ASICs rapidly growing in complexity and volumes."
Is the stock a buy?
One consequence of the recent price surge is Broadcom's valuation. The stock currently trades for about 35 times forward earnings, compared to a multiple of 30 for the S&P 500. While that's admittedly a premium valuation, it shouldn't be viewed in a vacuum. Broadcom has outperformed the broader market by a wide margin over the past five years, generating gains of 592%, roughly seven times the return of the broader index.
When viewed through that lens, I'd argue Broadcom is a buy.
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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
