A $50,000 investment in Broadcom (AVGO +4.69%) 10 years ago would be worth about $1.1 million today (excluding dividends). That’s roughly a 35% annualized return, and repeating that feat over the next decade is a tall order.
Still, it’s possible if the artificial intelligence (AI) boom keeps pushing data center spending higher and Broadcom continues to win a meaningful share of that budget.
Image source: Getty Images.
What needs to go right
Investors buying shares today are looking for a 20-fold return to turn a $50,000 investment into $1 million. It might seem unrealistic for a company with a $1.6 trillion market cap, but when you look at what’s happening with Broadcom’s business and the AI spending cycle, it’s not that far-fetched a goal.
First, Broadcom has a proven growth engine. Over the past decade, revenue grew at about a 17% annual rate. The bigger story, though, is that profitability improved along the way, which helped earnings grow faster than sales, and earnings power is what typically drives long-term stock returns.
Second, despite the recent sell-off in tech stocks, AI infrastructure spending continues to grow. Broadcom benefits from selling high-performance networking and customized AI chips for data centers. Leading cloud companies, including some of the “Magnificent Seven,” are expected to spend at least $600 billion this year, up about 50% year over year, based on The Motley Fool’s research.
Importantly, they can afford it. Two of Broadcom’s top customers — Alphabet and Meta Platforms — generated a combined $280 billion in cash from operations last year, providing the cash needed to fund AI infrastructure.
Today’s Change
(4.69%) $16.63
Current Price
$371.54
Key Data Points
Market Cap
$1.8T
Day’s Range
$360.82 – $376.55
52wk Range
$161.61 – $414.61
Volume
1.5M
Avg Vol
27M
Gross Margin
64.96%
Dividend Yield
0.67%
Third, Broadcom’s outlook points to tremendous growth. Management expects momentum to accelerate as demand for its custom AI chips, or XPUs, expands across five top customers. Two keys to growth over the next few years are Google’s next-generation Tensor Processing Units (TPUs) and Meta’s and OpenAI’s custom chip deployments.
Finally, the valuation leaves room for upside if growth shows up. Analysts forecast annualized earnings growth of about 41% over the next few years. If Broadcom executes, that could support strong returns for the stock, as investors are paying just 32 times this year’s expected earnings.
What could go wrong?
The biggest risk is that data center spending can be cyclical. Budgets can pause or dip even in a long-term uptrend, and those slowdowns could send the stock down. Another key risk is that Broadcom depends heavily on six large customers. If these customers slow capital spending, it would negatively impact Broadcom.
Nothing is guaranteed in the stock market. AI spending must continue to grow rapidly, and Broadcom must deliver on its innovation roadmap. However, if we’re still in the early innings of a multiyear AI infrastructure build-out, as some investors believe, this stock could ultimately help deliver millionaire-making gains, as part of a diversified portfolio.
