With shares up by over 500% over the last five years, Broadcom (NASDAQ: AVGO) has been a big winner in the artificial intelligence (AI) boom. Let’s dig deeper into the pros and cons of the stock to determine if it can generate similar returns over the next half-decade.
Why Broadcom?
The current iteration of Broadcom came to be from the 2016 merger of Avago Technologies and Broadcom Corporation to unlock synergies and better meet the demands of large clients. It specializes in semiconductor products, enterprise software, and data center equipment. And it emerged alongside Nvidia as an ideal way for investors to bet on the picks and shovels of the AI gold rush.
Unlike Nvidia, which is mainly known for its high-end general-purpose graphics processing units (GPUs) like the H100 and A100 (which train ChatGPT), Broadcom focuses on client customization.
The company is a leader in the market for application-specific integrated circuits (ASICs), which are chips designed specifically for a particular company’s use case. Broadcom’s more than three decades of custom chipmaking have given it the experience and customer relationships needed to quickly pivot to the growing AI-related demand. The company’s major clients include Alphabet‘s Google and Meta Platforms.
Business is booming
AI-related excitement is helping boost Broadcom’s operational results. Second-quarter revenue jumped 43% year over year to $12.49 million, powered by demand for data center hardware and Broadcom’s recent acquisition of VMware, a software company specializing in virtual machines, which run programs and deploy apps on the cloud.
While Broadcom is far from a pure play on AI, its footprint in different technology niches gives it welcome diversification. And while this strategy could limit near-term growth relative to more specialized rivals like Nvidia (which saw sales jump 262% in its most recent quarter), it gives Broadcom investors more safety because it is less vulnerable to a potential slowdown in AI chip demand.
Image source: Getty Images.
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