Is Broadcom a Top Artificial Intelligence (AI) Stock to Buy Right Now?

Broadcom (AVGO) has become a notable name among investors interested in AI. However, evaluating its attractiveness isn’t as straightforward as investing in companies like Nvidia or Palantir, which earn a large part of their revenue directly from AI.

Broadcom offers a wide range of products, making it a more diversified investment option. While diversification generally helps, it can also hinder a company’s ability to capitalize on specific technological advancements. This raises the question: is Broadcom a wise choice for AI investment, or is its product portfolio too varied to gain from this transformative shift in technology?

A Non-AI Division Fuels Broadcom's Growth

Browsing through Broadcom’s product offerings may be overwhelming due to the extensive variety available. The company provides both hardware and software, including cybersecurity solutions, mainframe software, and connectivity products. Its most significant addition to its software lineup came through the acquisition of VMware.

VMware specializes in cloud-based virtual desktop services, which are essential but not directly tied to AI. It significantly contributes to Broadcom's revenue growth.

In the fiscal third quarter of 2024, which ended on August 4, Broadcom reported a remarkable 47% year-over-year revenue growth, hitting $13 billion. However, excluding VMware's impact (since VMware's results were not part of the Q3 FY 2023 figures), Broadcom's revenue growth was only 4% year-over-year.

This growth rate might seem lackluster compared to other companies focused on AI, which are typically seeing rapid increases in their revenues.

That said, a closer look shows Broadcom's AI-related products exhibiting exceptional performance.

High Stock Valuation for Broadcom

Broadcom's standout AI products include connectivity switches and custom accelerators, such as the Tensor Processing Unit (TPU) developed in partnership with Alphabet. In Q3, custom accelerators saw a staggering 350% year-over-year growth, while Ethernet switching devices used in servers to manage data flow surged by 400% year-over-year.

Such growth in these product areas is impressive, but it is somewhat overshadowed by other segments of Broadcom’s business that are performing less robustly.

Despite this, analysts on Wall Street forecast that Broadcom's growth will accelerate in fiscal year 2025, with 37 analysts estimating an average revenue growth of 17.5%. They anticipate that AI-related growth will significantly influence Broadcom next year. But does this prediction justify buying the stock at its current price?

Broadcom’s stock is considered expensive, trading at nearly 38 times its forward earnings.

These high expectations imply a premium price for the stock, which Broadcom has yet to fulfill when VMware's contributions are discounted.

Broadcom is undoubtedly a strong company with excellent products. However, its extensive variety of offerings makes it challenging to discern the impact of AI advancements on the overall business. The market seems to believe that noticeable effects will emerge by 2025, yet this may be an optimistic outlook, as AI’s influence has been evident for approximately a year and a half.

For those seeking AI investments, there are likely better options than Broadcom, especially since many alternatives are experiencing faster growth and are available at more attractive prices, such as Alphabet or Meta Platforms. While Broadcom may eventually prove its worth, the current stock prices make it a risky proposition.