Broadcom is a rising force in the data center chip market.
Data center spending is expected to surge to between $3 trillion and $4 trillion or more by the end of the decade.
Broadcom stock is still attractively priced.
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The advent of artificial intelligence (AI) roughly three years ago has almost single-handedly transformed the technology landscape. Most market watchers credit these innovations with fueling the current bull market and driving many semiconductor and AI-adjacent stocks to new heights. One such company is Broadcom(NASDAQ: AVGO).
Since early 2023, the chipmaker and infrastructure specialist has soared 530% (as of this writing), sending some skittish shareholders running for cover. Yet many experts believe the AI boom has just begun, and the runway ahead is long. This leaves many would-be investors with a conundrum: Is Broadcom stock still a buy, or has the train already left the station?
Let’s review recent developments and attempt to predict what Broadcom’s stock price will be by 2030.
Image source: Getty Images.
While much of the focus on AI is on the chips used to ferry data through the ether, it’s worth taking a step back for a minute so as not to miss the forest for the trees. The vast majority of AI processing takes place in data centers, which gives Broadcom an inherent advantage. The company supplies many of the cutting-edge Ethernet switches and networking solutions that are critical components in most data centers. Indeed, management notes that “99% of all internet traffic crosses through some type of Broadcom technology.”
There’s more. While graphics processing units (GPUs) quickly became the go-to solution for AI processing, operators are now seeking more economical alternatives. That’s where Broadcom comes in. The company’s application-specific integrated circuits (ASICs) can be customized for specific tasks, making them more energy-efficient for these computing chores.
Overall demand for data centers is expected to continue. Nvidia(NASDAQ: NVDA) CEO Jensen Huang estimates that data center spending will reach between $3 trillion and $4 trillion by 2030. Global management consulting firm McKinsey & Company is even more bullish, suggesting the data center buildout will reach $5.2 trillion worldwide by 2030, up tenfold from an estimated $500 billion in 2025. Much of that spending will be on semiconductors with the horsepower needed to power AI models and systems.
Nvidia is the market share leader with an estimated 92% share of the data center GPU market, according to IoT Analytics. That said, Melius Research analyst Ben Reitzes estimates that Broadcom will continue to erode Nvidia’s market share, eventually controlling 30% of the market.
Broadcom has been growing like wildfire in recent years, so it’s easy to be bullish. But let’s throw in some conservatism for good measure and run the numbers to see how it could play out.
Let’s assume data center infrastructure spending climbs to $3 trillion by 2030 (the low end of the estimates). History shows that approximately 39% of data center spending is on AI-capable chips, or roughly $1.17 trillion. If Broadcom is successful in wresting 20% of the AI chip market from Nvidia within five years (below the analyst’s 30% projection), that would work out to revenue of $234 billion annually by 2030, a 269% increase within five years.
Broadcom currently has a market cap of roughly $1.7 trillion (as of this writing) and has a forward price-to-sales (P/S) ratio of 27. Assuming its P/S remains constant, and if Broadcom were to generate $234 billion in revenue within five years (a big if), its stock price could jump 267% to $1,291 per share, pushing the company’s market cap to $6.1 trillion.
To be absolutely clear, this is purely fun with numbers and a thought experiment. Plenty of things will have to go right in order for Broadcom to reach these lofty heights, and reality isn’t always obliging. Nvidia has a long history of innovation (as does Broadcom), and investors shouldn’t expect the company to stand still while Broadcom steals its cheese.
In the meantime, the economic situation is far from stable, predictions about the adoption of AI could be too ambitious, or someone could invent a better mousetrap. Any one of these could change the rate of AI adoption. That said, even if these estimates regarding the data center buildout are directionally accurate, Broadcom stock could go much higher from here.
Finally, some investors might get hung up on Broadcom’s valuation, and at 94 times earnings, that’s understandable. However, the stock is selling for just 29 times next year’s expected earnings — which is much more palatable — and it carries a price/earnings-to-growth (PEG) ratio of 0.4, when any number less than 1 is the standard for an undervalued stock.
Given the vast opportunity and Broadcom’s inherent advantages in the space, I’d argue that’s a fair price to pay for a company with such a long road ahead.
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Danny Vena has positions in Broadcom and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Prediction: This Will Be Broadcom’s Stock Price 5 Years From Now was originally published by The Motley Fool
