The Nasdaq Composite has repeatedly reached new heights in 2024, achieving more than 110 new all-time highs. Its record run has been fueled by a series of encouraging developments. Adoption is accelerating artificial intelligence (AI) was the initial catalyst for the rebound, but investor sentiment has been boosted by easing inflation, recent interest rate cuts, and the US election results. The tech-focused index jumped 43% last year and is up about 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 began in October 2022. While every uptick is different, history can provide context. Bull markets have historically run for more than five years, on average. We are just over two years into the current streak, which suggests it will likely continue next year. Furthermore, in years following gains of 30% or more, the Nasdaq has risen an additional 19%, on average, suggesting that the coming year could be a good one for the market.
Investors have also welcomed the renaissance of stock splits. This means they examine companies that have split their shares, as this is generally the result of a well-run company with strong growth in sales and earnings. This 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 A 10-for-1 stock splitwhich he completed in mid-July.
Yet, despite its recent rally, there is reason to believe that Broadcom's impressive run will continue into 2025 and beyond. Read on to find out why.
Image source: Getty Images.
Broadcom provides a wide variety of semiconductor, software and security products that supply the mobile, broadband, cable and data center industries, but many investors continue to underestimate its reach. Management estimates that “99% of all internet traffic passes through some form of Broadcom technology.”
That's just the beginning. Broadcom includes “26 category-leading semiconductor software and infrastructure divisions,” according to the company. Its semiconductor solutions are critical components in the networking, server storage, broadband, wireless and industrial fields. 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 critical 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 next five years, with another $1 trillion spent to bring new data centers online. That's a significant opportunity for Broadcom.
Earlier this year, Broadcom's recent acquisition of 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 in the industry.
The results are compelling. For its fiscal fourth quarter (which 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 the growing demand for AI was driving the results. AI networking revenue increased 158% year over year, while sales of custom accelerators (XPUs) doubled, and revenue from connectivity products quadrupled.
For the upcoming first quarter, Broadcom is on track 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 lift 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 about to accelerate. Management predicts AI revenue of between $60 billion and $90 billion by fiscal 2027. Compared to the $12.2 billion in AI revenue it generated in fiscal 2024, that suggests growth of between 391% and 638% over the next 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 just as bullish. Analysts' average price target is around $234 (as of this writing), which represents a 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 far more bullish than his Wall Street colleagues. This week, he increased his price target to $300, which represents a potential for investors of 36%. He is particularly excited about the opportunity surrounding application-specific integrated circuits (ASICs), which he believes will play a growing role in AI. He goes on to note that Broadcom is “in a unique position with AI ASICs growing rapidly in complexity and volume.”
One of the consequences of the recent surge in prices is Broadcom's valuation. The stock currently trades for around 35 times forward earnings, compared to a multiple of 30 for the S&P 500. Although it is admittedly a premium valuation, it should not be seen in a vacuum. Broadcom has significantly outperformed the broader market over the past five years, generating returns of 592%, roughly seven times the returns of the broader index.
Viewed through that lens, I'd argue that Broadcom is a buy.
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Danny Vena He has jobs at Nvidia. The Motley Fool has positions in Nvidia and recommends. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
