Get to know Wall Street’s newest $1 trillion artificial intelligence (AI) stock — but don’t rush to buy it right away

Additionally, the company announced that its AI connectivity revenue quadrupled thanks to sales of its Tomahawk and Jericho data center switches. These devices regulate how quickly data is transferred between chips and devices, and since AI developers often use tens of thousands of chips to train their models, faster processing can result in significant cost savings.

Broadcom posted total revenue of a record $51.5 billion for the full fiscal year 2024, an increase of 44% over fiscal year 2023. However, most of this growth was due to the first-time inclusion of VMware’s revenue, rather than organic growth (Broadcom acquired the company in 2023).

Still, Broadcom managed to impress investors with its AI revenue, which rose a whopping 220% to $12.2 billion in fiscal 2024. Most of this came from sales of the AI ​​accelerators and networking equipment discussed previously, and the company expects to continue to maintain strong momentum heading into fiscal 2025.

Broadcom’s overall revenue growth was accompanied by a significant increase in costs, driven in part by the company’s acquisitions (particularly VMware). For example, research and development spending increased 78% year-over-year to $9.3 billion, which was the highest of the company’s $19 billion in total operating expenses in fiscal 2024.

As a result, Broadcom’s fiscal 2024 net income (profit) of $5.9 billion actually represented a 58% decline from fiscal 2023. That significantly impacts the valuation of Broadcom stock for any investor, which values ​​them based on their GAAP earnings, which I’ll get to in a moment.

On a non-GAAP basis, which excludes one-time charges from acquisitions and non-cash costs such as stock-based compensation, Broadcom’s net income was $23.7 billion, an actual increase of 28%. increase from fiscal year 2023. This gives investors a clearer idea of ​​Broadcom’s business performance.

Broadcom posted fiscal 2024 GAAP earnings per share (EPS) of $1.23, giving the stock trade at a price-to-earnings (P/E) ratio of 183. That’s a staggering number when you think about it Nasdaq-100 The technology index trades at a P/E ratio of just 35.

Based on non-GAAP EPS of $4.96, the P/E ratio is 45. While significantly better, it’s still a large number compared to the broader tech sector. Additionally, many investors do not consider non-GAAP EPS to be “real” profitability. Therefore, it’s not a good idea to rely on this number to argue that Broadcom stock looks attractive.

Instead of using the traditional P/E ratio, we could instead value Broadcom using the price-to-sales (P/S) ratio, which divides a company’s market capitalization by its annual revenue. Broadcom’s P/S ratio is currently 20.7, almost triple its 10-year average of 7.4:

In other words, Broadcom stock looks very expensive based on two metrics, the P/E ratio and also the P/E ratio. Therefore, buying the stock now is probably not a good idea for short-term investors with a 12-month time horizon.

However, for long-term investors willing to hold the stock for the next three years or longer, there could be a compelling case to buy. Broadcom expects that, thanks to increasing demand for accelerators and network devices, the company can increase its AI sales to $60 billion to $90 billion per year by fiscal year 2027.

Remember, AI revenue was just $12.2 billion in fiscal 2024, so we’re talking a whopping 514% increase over the next three years (mid-range).

I still think investors should wait for a dip before buying Broadcom shares given its current valuation, but it’s certainly a very high-value way to profit from the AI ​​boom.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Oracle and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.

Get to know Wall Street’s newest $1 trillion artificial intelligence (AI) stock — but don’t rush to buy it right now. It was originally published by The Motley Fool