Broadcom stock is grinding higher and looks set to set a record. The chip maker should continue to benefit from three significant drivers, according to Melius Research.
Broadcom stock was up 1% on Thursday. A 22% gain in the past month has left the stock sitting only a little way short of the highs of around $250 it reached in December.
There should be room for plenty more growth, according to Melius' Ben Reitzes, who raised his price target on Broadcom stock to $283 from $198, and reiterated a Buy rating in a research note. The hefty increase reflects an assigned price-to-earnings multiple of 30 times Broadcom's forecast earnings for fiscal 2027, up from 22 times previously.
Why the change? Firstly, Broadcom is a "must-own" artificial-intelligence stock despite its role as a secondary player to Nvidia when it comes to AI chips, with a realistic pathway to 43% compound annual revenue growth in AI processors through the end of the decade according to Retizes.
"Companies dual source compute from both Nvidia and Broadcom for flexibility around different workloads -- but all remain committed to both," Reitzes wrote.
Broadcom's December highs came on the back of commentary which flagged an AI revenue opportunity, or serviceable addressable market, of between $60 billion and $90 billion by 2027 just from its three existing hyperscale customers, which are generally believed to be Google parent Alphabet, Meta Platforms, and TikTok parent ByteDance. Since then, Broadcom has said it is working with seven customers on custom AI chips.
"With 7 XPU customers now confirmed, the serviceable addressable market could arguably be increased later in the decade to a range of $140-$210 billion -- with Broadcom garnering well over $70 billion in AI revenue later in the decade given its market share at these 7 customers," Reitzes wrote.
Secondly, while AI processors have been the headline for Broadcom, it is also a major provider of specialized networking chips. That business is also expected to boom with the construction of larger data centers for AI technology.
"We estimate the AI networking portion of Broadcom's revenue amounts to about $6 billion in 2025, growing 50% y/y [year-over-year], and can grow well over 20% long-term," Reitzes wrote.
Recent disappointing updates from Broadcom's peer Marvell Technology might have made some nervy about the custom AI chip sector. However, Reitzes argues that Broadcom's ability to deliver customer upgrades at an annual cadence gives it a technological advantage.
Finally, Broadcom could return more cash to shareholders, following its recent launch of a stock-buyback program of up to $10 billion. Considering Broadcom CEO Hock Tan's record of major acquisitions -- culminating in the $61-billion deal to purchase cloud computing firm VMware in 2022 -- investors might be skeptical but Reitzes thinks there's potential for both shareholder returns and deals.
"We believe that the company will continue to be opportunistic with buybacks -- and acquisitions if the regulatory environment improves under [President Donald] Trump," Reitzes wrote.