Broadcom: An Examination of Its Potential as an AI Stock Investment

Broadcom's diverse range of connectivity solutions has sparked interest in its role within the artificial intelligence (AI) sector. Unlike other major players such as Nvidia or Palantir, which rely heavily on AI for revenue, Broadcom offers a more varied portfolio. This variety comes with both advantages and challenges for investors looking specifically for AI exposure.

While Broadcom's extensive product offerings make it a diversified investment choice, such variety can also result in missing out on key technological trends. The question remains: is Broadcom a worthwhile AI investment, or is its expansive product line too broad to fully capitalize on this emerging tech trend?

Growth Driven by Non-AI Segments

Navigating Broadcom's product catalog can be overwhelming due to its comprehensive range of hardware and software solutions, including cybersecurity and mainframe software alongside its connectivity products. A significant contributor to its revenue growth has been the acquisition of VMware, which offers virtual desktop services via the cloud, though it does not directly relate to AI.

In the third quarter of the fiscal year 2024, Broadcom reported a revenue increase of 47% year-over-year, reaching $13 billion. However, if we exclude VMware's results from this calculation, the actual growth in revenue is only around 4% when compared to the same quarter in the previous fiscal year. This subdued growth raises questions for those expecting substantial returns from an AI-focused investment.

Yet, when scrutinizing the details, Broadcom's AI-related products exhibit remarkable performance.

Rising Costs for Broadcom Stocks

The primary AI products from Broadcom include its connectivity switches and custom accelerators, with notable designs such as the tensor processing unit (TPU) for Alphabet. In the third quarter, custom accelerators saw an impressive growth of 350% year-over-year, while ethernet switching devices used for data flow management in servers experienced a 400% increase. While this growth is commendable, the overall impact on Broadcom's financial health is somewhat obscured by the performance of other, less dynamic business segments.

Looking ahead, market analysts are optimistic about Broadcom's growth trajectory, projecting an average revenue increase of 17.5% for fiscal year 2025, according to a survey of 37 analysts. They foresee that AI-related advancements will more significantly influence revenue streams in the coming year. Nonetheless, this outlook prompts the ongoing question: is it wise to consider Broadcom a buy at present?

Broadcom's stock is trading at nearly 38 times its expected earnings, suggesting high market expectations that the company may struggle to meet, particularly when excluding the impact of VMware's acquisition.

Broadcom is indeed a reputable company with quality products. However, the multitude of its offerings makes it challenging to pinpoint how effectively AI is contributing to its overall business. While the market appears to anticipate noticeable AI benefits by 2025, this expectation may be overly ambitious, given that AI has been a growing focus for about 18 months now.

In conclusion, investors might find more promising AI stock picks than Broadcom, as other companies may show faster growth rates and offer more attractive pricing, such as Alphabet or Meta Platforms. While Broadcom could potentially validate this skepticism, the current stock price presents a considerable risk for investors looking for solid AI exposure.

Broadcom, AI, Investment