Is Broadcom a Millionaire-Maker Stock?
Key Points
Broadcom has seen a spike in demand for its custom AI chips and networking equipment.
AI semiconductor revenue accounted for over 56% of Broadcom's total revenue in its recent quarter.
Broadcom has done well in building a software and hardware ecosystem that generates multiple revenue streams.
- 10 stocks we like better than Broadcom ›
Only a handful of companies have benefited more from the current artificial intelligence (AI) boom than Broadcom (NASDAQ: AVGO). Shares of the semiconductor giant are up 330% in the past three years, and Broadcom now sits as the world's ninth-most valuable company, with a market capitalization of $1.68 trillion (as of Sept. 28).
Broadcom has made plenty of millionaires through the years, but after its current run-up, has that ship sailed? If you have time on your side, I don't believe so.
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The math behind reaching $1 million from scratch
Whether a stock is a millionaire maker depends largely on two things: how much you have to invest and how long you have to invest. If you have $500,000 to invest at once, reaching $1 million is much easier than if you needed $25,000 to grow 40-fold. The same goes for time. If you're trying to go from scratch to $1 million in a decade, you'll need much higher returns than someone with a 20-year horizon.
Investors are more likely to have time than a six-figure lump sum, so for our example, we'll assume a 20-year horizon. Here are different investment amounts and average annual return combinations that it would take to reach a million if you're starting from scratch:
| Annual Investment (Monthly) | Average Annual Returns |
|---|---|
| $3,000 ($250) | 24.8% |
| $6,000 ($500) | 19.1% |
| $9,000 ($750) | 15.7% |
| $12,000 ($1,000) | 13.3% |
| $18,000 ($1,500) | 9.8% |
Data source: Table by author.
If you can invest $750 to $1,500 in Broadcom monthly, I see it as a millionaire maker. If you're starting from scratch and trying with just $250 monthly, it's a bit more far-fetched to happen in 20 years.
Riding a high, but built to last
Broadcom's recent success is mostly due to its role in the AI ecosystem, supplying custom AI chips and networking equipment. In the third quarter (Q3), semiconductor revenue from AI jumped 221% year over year to $16.7 billion. In Q4, it expects it to jump 236% year over year to $21.7 billion. This continues an impressive run, with Broadcom's revenue and net income up 218% and 271%, respectively, over the past three years.
AVGO Revenue (Quarterly) data by YCharts
The current AI boom has Broadcom in a great place, but if you're investing with seven figures in mind, the business needs to be built to last. In Broadcom's case, it has done a good job building a hardware and software ecosystem that keeps business steady beyond the current hype.
AI aside, Broadcom's chips and wireless parts are used in everything from smartphones to broadband equipment to smart TVs. Right now, it has high customer concentration, with AI hyperscalers (companies that own major data centers) spending hundreds of billions to build out their data centers, but Broadcom's business is a huge part of the overall tech infrastructure.
Trading at 30 times its projected earnings over the next 12 months, Broadcom's stock is expensive. It's much cheaper than the 41 it traded at in June but still expensive enough that investors should be aware the stock could be vulnerable to a pullback. Still, if you're in it for the long haul, this shouldn't deter you.
Should you buy stock in Broadcom right now?
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.
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