Broadcom Is Less Than 5% From the $2 Trillion Club -- and Apple Just Committed $30 Billion for More Chips

Broadcom (NASDAQ: AVGO) is closing in on a milestone only a handful of companies have ever reached. As of this writing, the semiconductor and infrastructure-software giant is worth about $1.91 trillion. That leaves it less than 5% shy of a $2 trillion market capitalization, and at the current share count, a move to about $420 per share would get it there.

The stock rose more than 3% on Thursday alone, so it could get to this milestone quickly.

The latest catalyst for the stock came from Apple (NASDAQ: AAPL). On Wednesday, the iPhone maker said it will spend more than $30 billion with Broadcom over the coming years, deepening a supplier relationship that already runs deep. It's the sort of headline that can make a $2 trillion valuation feel almost preordained.

But just because there's a clear potential path to $2 trillion doesn't mean it can stay there.

So how solid is the ground under Broadcom's climb toward the $2 trillion club?

Image source: The Motley Fool.

The AI engine behind the climb

Zooming out behind the last few days, the broader catalyst for Broadcom isn't the Apple deal -- it's artificial intelligence (AI).

In its fiscal second quarter (ended May 3), Broadcom's AI semiconductor revenue reached $10.8 billion, up 143% year over year. That's the line item investors are really paying for. Management expects it to keep accelerating. It guided for about $16 billion in the current quarter, which would be roughly 200% growth, and has reaffirmed a target of more than $100 billion in AI semiconductor revenue in fiscal 2027.

Those numbers aren't a forecast built on hope. Indeed, Broadcom designs custom AI accelerators and networking chips for the largest cloud companies as they build out data centers. The order book backs the guidance up, too. The company said bookings for AI semiconductors have topped $30 billion, giving it rare visibility into future demand.

Total revenue for the quarter rose 48% year over year to a record $22.2 billion, and free cash flow came in above $10 billion, or 46% of revenue.

In other words, the market isn't valuing Broadcom near $2 trillion on hope, but rather on underlying business momentum.

What the Apple deal actually locks in

So where does Apple fit into all this?

Apple's commitment, announced Wednesday, is expected to exceed $30 billion and runs through 2031. It covers custom silicon and advanced wireless connectivity parts, including the radio-frequency filters tucked inside iPhones and other devices, all to be made in the U.S. Broadcom will spend $1.5 billion to modernize its plant in Fort Collins, Colorado. All told, the companies say the arrangement will produce more than 15 billion American-made chips -- the largest single piece of Apple's push to expand domestic manufacturing.

But the deal doesn't appear to be a resh data center AI windfall. Apple has long been one of Broadcom's largest customers, primarily for wireless and connectivity components. So this deal deepens a relationship Broadcom already had. It doesn't open a new one.

That still counts for a lot. Locking in years of orders from a longtime customer strips out a real source of uncertainty. But it's a different kind of good news than the AI ramp, and it's worth keeping the two straight.

Overall, I think the underlying business strength is durable.

But what about the valuation?

Even after its run, Broadcom trades at about 25 times forward earnings. That's not cheap. But it's far below the triple-digit multiples of some of the market's hottest AI names, and it looks reasonable relative to the growth the company is actually posting.

The bigger risk, of course, is the same force that got the stock here. A valuation this size assumes the data center build-out keeps compounding, and any real sign that cloud spending is cooling could hit Broadcom stock particularly hard.

But I do think the odds are high that Broadcom gets to a $2 trillion market capitalization and continues compounding for years to come. The business behind the number is delivering -- AI semiconductor revenue growing at a triple-digit rate, now with an anchor customer locked in through the end of the decade. Of course, the ride will be filled with some ups and downs.

Daniel Sparks and his clients have positions in Apple. The Motley Fool has positions in and recommends Apple and Broadcom. The Motley Fool has a disclosure policy.