Why Broadcom Stock Soared 44% in December

Shares of the semiconductor company Broadcom (NASDAQ: AVGO) soared last month after the company's fourth-quarter financial results surpassed Wall Street's expectations. Broadcom is a leader in application-specific integrated circuits (ASICs) used in artificial intelligence (AI) data center infrastructure. That's just the long way of saying its chips are used for AI processing.

Broadcom's shares jumped by 43% in December, according to data provided by S&P Global Market Intelligence, as investors cheered the company's top- and bottom-line results in the quarter.

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Rising momentum from AI and an acquisition

Broadcom reported sales of $14 billion in the quarter (which ended Nov. 3), an increase of 51% from the year-ago quarter and mostly on par with analysts' consensus estimates. The company's non-GAAP (adjusted) diluted earnings increased by 28% to $1.42 per share, sparking investor enthusiasm, considering Wall Street's average estimate was $1.38.

Broadcom's full-year results were also impressive. Revenue grew 44% to a record $51.6 billion, and the company reached $12.2 billion in AI revenue, an increase of 220% from 2023.

Broadcom's management highlighted two growth areas in the fourth quarter and in 2024, noting that its acquisition of VMware and its artificial intelligence pursuits are paying off. VMware is a cloud computing service that allows companies to set up virtual machines for users. Broadcom closed on the deal in early 2024, and it said in its recent financial results that the acquisition will exceed its initial earnings before interest, taxes, depreciation, and amortization (EBITDA) expectations.

"We are well on the path to delivering incremental adjusted EBITDA at a level that significantly exceeds the $8.5 billion we communicated when we announced the deal," Broadcom CEO Hock Tan said on last month's earnings call.

Additionally, investors were no doubt pleased that Broadcom's AI revenue spiked 220% in 2024 to $12.2 billion. Just a few months ago, Broadcom raised its AI revenue estimate from its initial projection of $11 billion.

With Broadcom exceeding its initial estimate, it's clear that demand for the company's ASICs is in full swing. With the jump in AI revenue, the company's artificial intelligence technology now accounts for 41% of its total semiconductor sales.

It's only the beginning

Broadcom is tapping into a fast-growing AI infrastructure market that's just getting started. Fellow AI chip competitor Nvidia believes AI data center spending could reach $2 trillion over the next five years. As companies ramp up spending to compete in the AI wars, Broadcom's processors are already well positioned to benefit, and the company knows it.

"We see our opportunity over the next three years in AI as massive," Tan said on the call.

With Broadcom's shares trading at a forward price-to-earnings ratio of 36.6, its stock isn't exactly cheap. But AI's huge potential to transform the tech industry makes Broadcom's share price premium a little easier to accept.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.