Why Broadcom Could Be the Best Stock-Split Buy Heading Into 2025

An Eventful Year for Investors

It has certainly been an eventful year for investors in Broadcom (NASDAQ: AVGO). Over the past 12 months, the stock has more than doubled in value, showcasing a remarkable turnaround for those who believed in its potential. This summer, the company executed a stock split aimed at lowering its share price, yet enthusiasm stemming from recent earnings reports sent the stock soaring to nearly $250. While stock price movements don’t always align perfectly with underlying business developments, Broadcom’s recent advancements highlight its strong potential, especially in the rapidly evolving artificial intelligence (AI) chip market, positioning it as a top stock-split buy as we head into 2025.

Broadcom’s Emerging Opportunity in AI Inference

Historically, Broadcom has specialized in semiconductors designed for networking, switching, and other connectivity applications. This established expertise is paying dividends as the company accelerates into the AI chip segment. By developing custom chips known as XPUs (extreme processing units), Broadcom is setting itself up to capitalize on AI-specific tasks. While Nvidia has dominated the AI chip market with its powerful GPUs (graphics processing units) tailored for training AI models, Broadcom is strategically targeting AI inference tasks.

To clarify, think of AI training as building a vehicle with enough horsepower to speed down a straightaway, while AI inference is akin to fine-tuning that car to smoothly navigate a winding mountain road. In practical terms, inference translates AI’s intelligence into real-world applications efficiently enough to run on compact devices such as smartphones and small computers.

Though Nvidia provides chips suitable for inference applications, many companies are cautious about relying solely on a single supplier for all their needs. The AI revolution has already significantly enhanced Nvidia’s profit margins, but Broadcom is poised for its own surge.

Broadcom’s Growth Prospects

Broadcom’s recent fiscal report for Q4 of 2024 highlighted its strong momentum in the AI arena. The company’s total AI revenue skyrocketed by an impressive 220% to $12.2 billion. Management discussed the prospects for its AI XPUs during the earnings call, revealing that they have secured partnerships with three prominent customers with multigeneration product roadmaps, each aiming to amass over a million XPU chips in a single cluster by 2027. Plus, there are two additional large-scale AI customers in the pipeline developing custom AI XPU chips.

Financially, Broadcom’s management estimates that its AI-related market opportunity could range between $60 billion and $90 billion by 2027, eyeing a leading share of that expansive market. There are whispers suggesting Broadcom is collaborating with ChatGPT developer OpenAI and Apple on inference chips, providing credence to the idea that the company could play a larger role in the AI chip market than previously anticipated.

Despite its recent fiscal triumphs, Broadcom’s AI revenue of $12.2 billion is only the beginning. The stock is still catching up to the vast potential these opportunities entail.

Market Valuation and Future Outlook

It’s crucial to remember that chasing hot stocks can often lead to pitfalls, and with Broadcom’s stock climbing 50% just over the past month, caution is advised. Nevertheless, this upward trajectory isn’t merely hype; it’s justified by substantial growth fundamentals. Analysts are adjusting their long-term earnings growth estimates as Broadcom’s tipping point in the AI sector comes into clearer focus.

Even with the stock’s impressive ascent, Broadcom’s forward P/E ratio of 40 presents a reasonable valuation for a company expected to see more than 21% annual earnings growth over the next three to five years. Additionally, the stock’s PEG ratio of 1.9 indicates that Broadcom’s growth expectations are aligning more closely with its valuation. While I’m comfortable investing in high-quality stocks that exhibit PEG ratios between 2.0 and 2.5, Broadcom appears to have more fuel in its tank as it approaches production phases with its newest AI chip clients.

Moreover, it’s vital to acknowledge that Broadcom’s software business has experienced significant growth due to its acquisition of VMware last year. The current valuation remains compelling for investors as we move into 2025 and prepare for an expansion in AI applications over the coming years.

Conclusion: A Solid Investment for Conservative Investors

For conservative investors who thrive on traditional financial principles, Broadcom represents an attractive proposition moving into 2025. The momentum in its AI chip development could unlock vast opportunities, positioning Broadcom as a top choice for anyone looking to invest in a solid technology stock. With its recent growth, expanding market opportunities, and reinforced fundamentals, Broadcom stands out as a stock to watch and potentially invest in as the AI boom accelerates. The company’s blend of established semiconductor expertise and innovative AI initiatives places it in prime position to thrive in the years ahead.