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The semiconductor industry is undergoing a transformation, fueled mostly by the rapid adoption of artificial intelligence (AI). As AI becomes increasingly prevalent in a variety of industries, including data centers, autonomous vehicles, consumer electronics, and healthcare, demand for advanced semiconductors is increasing. This is why semiconductor stocks appear to be attractive long-term investments right now, as AI relies heavily on semiconductors to power its operations.
Broadcom (AVGO) is currently a popular AI pick. It has established itself as a major player in the semiconductor and infrastructure software markets. With a diverse portfolio spanning chips for data centers, networking, and wireless communications, as well as enterprise software solutions, Broadcom is more than just a semiconductor company.
The company recently completed a 10-for-1 forward stock split to make its shares more accessible to investors. AVGO stock is up 42.5% year to date, compared to the tech-heavy Nasdaq Composite's ($NASX) 26.9% gain. Let's see what's in store for the company in 2025.
Why Broadcom Stock is Outperforming
Broadcom has two main business segments: semiconductor solutions and infrastructure software. The semiconductor segment generates the majority of Broadcom's revenue. Its products are used in a variety of applications, including networking and data centers, wireless communications, broadband access and connectivity, industrial, and automotive. In the most recent third quarter, the segment generated $7.27 billion in revenue, up 5% year on year.
Meanwhile, the infrastructure software segment, which accounted for 44% of total revenue, increased by an impressive 200% to $5.79 billion. Total consolidated revenue in the quarter increased 47% year-over-year to $13.07 billion, while adjusted diluted earnings grew by 18% to $1.24 per share.
Management specified that continued strength in the company’s AI semiconductor solutions and contributions from the VMware acquisition led to another strong quarter. Broadcom acquired cloud software company VMware in 2023.
Looking to the full year, management predicts that AI revenue will be around $12 billion in fiscal 2024. Management expects contribution from VMware will lead to a 43.8% increase in revenue to $51.5 billion for the full fiscal year.
Analysts tracking AVGO expect $51.7 billion in revenue in fiscal 2024, followed by another 16.9% increase in the next fiscal year. Analysts expect earnings to increase by 14.8% in fiscal 2024 and 27.7% in fiscal 2025.
AVGO is Also a Dividend Stock
Broadcom is known for returning value to shareholders through dividends and share buybacks. The company generated $4.7 billion in free cash flow during the most recent quarter, which allowed it to pay $2.4 billion in dividends.
AVGO pays a dividend yield of 1.29%, which is slightly lower than the tech sector average of 1.37%. The AI chip giant has been increasing its dividends for the last 15 years.
Furthermore, its forward payout ratio of 34.3% is sustainable with the current earnings growth.
What Does Wall Street Say About Broadcom Stock?
Following its Q3 results, DBS analyst Fang Boon Foo maintained a “buy” rating for AVGO, citing the company’s solid performance in the AI chip market and strategic acquisitions. Similarly, Jefferies and Bank of America Securities analysts also reiterated their respective “buy” ratings for the stock.
On Wall Street, AVGO stock is a “strong buy” overall. Out of the 33 analysts in coverage, 30 rate it a “strong buy,” and three recommend a “hold.”
Based on AVGO’s mean target price of $195.71, the stock has a potential upside of 22.6% from current levels. Plus, its high price estimate of $240 indicates the stock could go as high as 50.3% in the next 12 months.
Broadcom’s diverse product portfolio, strong financial performance, and strategic acquisitions position it for sustained growth in high-demand markets like data centers, 5G, and enterprise software. Trading at 26 times forward 2025 earnings, AVGO seems like a reasonable semiconductor stock to buy now with long-term prospects in AI.
