Broadcom's AI Growth Is Unstoppable. Is the Dividend-Paying Growth Stock a Buy Now?

Shares of Broadcom (NASDAQ: AVGO) are up more than 780% in the last five years, pole-vaulting its market cap to over $900 billion. Besides being one of the most valuable companies in the world, it is also one of the most exciting investment opportunities in artificial intelligence (AI).

Here's why Broadcom's innovation is kicking into a higher gear, and why this growth stock is a buy now.

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A balanced business

Diversification is the single most compelling reason to invest in Broadcom over other semiconductor stocks. Nvidia makes most of its sales and operating income from graphics processing units (GPUs) for data centers and AI applications. Advanced Micro Devices has a growing GPU business but is still heavily dependent on CPU sales for consumers, professional clients, and gaming. And it hasn't yet proved that it can take market share from Nvidia.

Broadcom is unique because it combines a rapidly growing AI segment with an established networking business and a massive infrastructure software business thanks to its acquisition of VMware. The semiconductor segment provides networking solutions, server storage, broadband, wireless, and industrial solutions for enterprise clients, hyperscale data centers, and residential clients.

The infrastructure software segment provides solutions for mainframes, cybersecurity storage area networking, and cloud infrastructure. In total, Broadcom has an integrated global-connectivity product and services business that is in a league of its own.

Hyperscalers love Broadcom's accelerator chips

The company's blend of legacy products and services and upside potential from AI makes it an intriguing stock for investors looking for a balance of growth and value. In its latest period, which was the first quarter of fiscal 2025, AI revenue grew 77% to $4.1 billion -- meaning AI alone made up 27.5% of total revenue.

The infrastructure software segment grew 47% thanks to the impact of VMware. So, Broadcom is benefiting from a savvy acquisition and industry tailwinds in AI.

Its AI is centered around its XPUs and connectivity solutions for AI data centers. XPUs are accelerator chips, more formally known as application-specific integrated circuits (ASICs). They are built for specific tasks and can be cheaper but less flexible than GPUs.

The company's accelerator chips and connectivity switches are received well by hyperscalers. And Broadcom plans to massively improve the efficiency of this hardware in the coming years. Management believes it will rapidly grow sales to the three hyperscale clients that make up its core, and two more hyperscalers that have become increasingly interested in its solutions.

Management is pouring money into research and development to build the next generation of high-processing-power XPUs and clusters of 500,000 accelerators for hyperscale customers. Eventually, it believes it can reach clusters of 1 million accelerators for these customers, which will help the company tap into its addressable market that is forecast to reach $60 billion to $90 billion by fiscal 2027.

The growth in AI is helping offset a cyclical slowdown in other areas of its business. Semiconductor revenue not associated with AI fell 9% year over year, which Broadcom attributed to a seasonal decline in wireless sales and a bottoming out in broadband sales.

Leveraging hardware and software

Growing demand for Broadcom's XPU chips is a significant catalyst for long-term growth, as is its software segment. VMware cloud foundation (VCF) is a software-as-as-service platform for computing, storage, networking, and cloud management services.

On the latest earnings call, CEO Hock Tan said the following about potential growth in the software business:

We are upselling customers to a full-stack VCF, which enables the entire data center to be virtualized. And this enables customers to create their own private cloud environment on-prem [on premises]. And as of the end of Q1, approximately 70% of our largest 10,000 customers have adopted VCF. As these customers consume VCF, we still see a further opportunity for future growth.

Broadcom's combination of network connectivity hardware, AI accelerator chips, and software solutions for enterprise customers and data centers illustrates the sheer depth and breadth of the business. With multiple avenues for monetizing AI, the company can get more business from its top hyperscale clients.

A good value and a growing dividend

Broadcom is a complete business with tremendous growth potential. The only question now is whether the stock is still a good value or has become too expensive.

Analyst consensus estimates for fiscal 2025 earnings are $6.60 per share, and $7.81 per share in fiscal 2026. After popping 8.6% on March 7 in response to its earnings and guidance, the stock is now around $195 per share.

At that price, it has forward price-to-earnings ratio of 29.2 based on fiscal 2025 results. That's reasonable for a high-octane growth stock with multiple ways to profit from AI.

The cherry on top of Broadcom's underlying investment thesis is its dividend. Thanks to exponential earnings growth, the company rapidly increased its dividend. Even after the stock's massive run-up in recent years, it still yields 1.2%.

That's comparable to the yield of the S&P 500 even though Broadcom is growing far faster than the average company in the index.

A high-conviction buy

Broadcom remains one of the best chip stocks (and tech stocks in general) to buy now. Nvidia also stands out as a solid buy, but Broadcom is arguably a better foundational holding because of its diversification and track record for earnings and dividend growth. Meanwhile, Nvidia's growth has exploded higher over the last couple of years, making it more difficult to value.

Broadcom generates plenty of free cash flow to ramp up spending on research and development, allowing it to push the bounds of what is possible in AI. Add it all up, and it's one of the best all-around stocks to buy now.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.