This Super Semiconductor Stock Just Dropped Out of the $1 Trillion Club. Is This the Ultimate Buying Opportunity?

Only seven American companies are worth $1 trillion or more, so it's an ultra-exclusive club. But getting there is only half the battle, because investors can be unforgiving during times of uncertainty. Broadcom (NASDAQ: AVGO) and Tesla have discovered that firsthand -- they both dropped out of the trillion-dollar club this year.

Broadcom stock is currently down 22% from the record high it set in December. With a market capitalization of $911 billion (as of this writing), it still trades at an elevated valuation, making it susceptible to further potential declines, particularly if this sell-off in the broader market worsens.

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However, Broadcom's artificial intelligence (AI) revenue continued to soar during its fiscal 2025 first quarter (which ended Feb. 2), and its long-term potential looks extremely promising. Investors will still have to pay a hefty premium to buy into this story today, but could the recent dip be the ultimate long-term opportunity?

A growing force in AI hardware

Broadcom used to have a relatively one-dimensional business, supplying semiconductors and components for a range of computing applications. But it merged with another chip giant called Avago Technologies in 2016, and from there, it transformed itself into a hardware and software conglomerate by spending almost $100 billion on acquisitions. Broadcom now owns semiconductor equipment supplier CA Technologies, cybersecurity powerhouse Symantec, and cloud software provider VMware.

However, investors have turned their focus back to Broadcom's semiconductor business because it has become a key supplier of data center chips and networking equipment specifically designed for AI workloads.

The company is currently helping three hyperscalers (cloud infrastructure giants like Alphabet) design their own AI accelerators for their data centers. Such chips are becoming a popular alternative to Nvidia's industry-leading graphics processors (GPUs) because they can be customized to suit the needs of each client.

Broadcom is helping its customers scale toward clusters of 500,000 accelerators to deliver the computing power they need to power next-generation AI models. However, it is also looking toward the future and preparing for a time when those cloud operators might want clusters of a staggering 1 million chips, which could be as soon as its fiscal 2027.

But getting to that stage requires more than chips alone, which is why Broadcom continues to advance its networking equipment. Its new Tomahawk 6 data center Ethernet switch helps regulate how quickly data travels between chips and devices, and it was specifically designed with larger workloads in mind, delivering around twice the bandwidth of the Tomahawk 5. The company will send samples of the Tomahawk 6 to customers for testing over the next few months.

Image source: Getty Images.

Broadcom's AI revenue is soaring

Broadcom generated $14.9 billion in total revenue during its fiscal 2025 first quarter. That was a 25% increase compared to the year-ago period -- a sharp deceleration from the 51% growth the company delivered in its fiscal 2024 fourth quarter.

Its year-over-year revenue growth rates were supercharged during fiscal 2024 because that was the first time its top line reflected the acquisition of VMware. Absent that one-time boost, in fiscal 2025, it will be back to relying on organic growth.

With that said, Broadcom's AI revenue soared by 77% year over year to a record $4.1 billion during its fiscal 2025 first quarter, so this part of its business is certainly generating organic growth in spades. Nevertheless, it has still barely scratched the surface of its estimated addressable market. CEO Hock Tan predicts that Broadcom's three current hyperscaler customers alone will spend up to $90 billion on AI accelerators and networking equipment in fiscal 2027 alone.

Plus, the company says it is deeply engaged with four other hyperscalers right now, and their planned capital expenditures don't factor into that $90 billion forecast. Therefore, it's no surprise Wall Street is laser-focused on the AI portion of Broadcom's business. While it represents less than one-third of the company's total revenue today, it could account for the majority within just a few years.

Broadcom stock isn't cheap now, but focus on the long term

Based on Broadcom's trailing 12-month GAAP (generally accepted accounting principles) earnings per share of $2.08, its stock trades at a price-to-earnings (P/E) ratio of 93.5. That makes it more than three times more expensive than the Nasdaq-100 technology index, which trades at a P/E ratio of 28.5.

Its valuation looks a little less extravagant based on its non-GAAP earnings per share of $5.35 over the last four quarters -- that results in a P/E ratio of 36.3 instead. However, non-GAAP results exclude important costs related to Broadcom's acquisitions, and since those deals have contributed to its growth, discounting them to calculate its earnings (and valuation) is somewhat disingenuous.

Besides, Broadcom stock also looks expensive based on its price-to-sales (P/S) ratio of 17.1, which is a whopping 119% premium to its 10-year average of 7.8.

AVGO PS Ratio data by YCharts.

I'm not suggesting Broadcom stock is a bad buy, but its elevated valuation means investors must be willing to hold it for the long term to maximize their chances of earning a positive return. For example, if the company's three hyperscaler customers do spend as much as management expects in fiscal 2027, the stock might actually be cheap at the current price -- but investors will need to stay the course for at least the next three years while that catalyst unfolds.

For investors who are willing to hold Broadcom stock for the long run, its recent 22% dip might be the buying opportunity they have been waiting for.

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Suzanne Frey, an executive at Alphabet, 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, Nvidia, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.