1 Action-Split Joins Nvidia, Apple, Microsoft, Amazon, Alphabet, and Meta in $1 Trillion Club

The U.S. economy has a remarkable record of creating the most valuable companies in the world. Steel in the United States became the first company to be valued at $1 billion in 1901. General Motors then in 1955 it rode the automotive revolution, becoming the first $10 billion company. In 2018 Apple became the first company to cross the $1 trillion mark thanks to the success of its iPhone.

Apple remains the world’s largest company with a market capitalization of $3.3 trillion, but tech giants have since joined the trillion-dollar club Nvidia, Microsoft, Amazon, Meta PlatformsAND Alphabet.

Broadcom (AVGO -0.49%) could join them. It’s currently valued at $761 billion, so its shares only need to gain 31.4% from this point on to earn membership. Here’s why I think it will.

Broadcom shares have recently surged, prompting a split

Broadcom was originally a semiconductor and electronics company, but since merging with Avago Technologies in 2016, it has embarked on a series of acquisitions. In 2018, it spent nearly $100 billion to buy semiconductor equipment maker CA Technologies, in 2019 cybersecurity giant Symantec and in 2023, cloud software developer VMware.

These acquisitions have boosted Broadcom stock to a 465% gain over the past five years, and earlier this year, it rose above $1,800, making it somewhat unaffordable for investors with small portfolios. As a result, Broadcom’s management team decided to execute a 10-for-1 stock split, increasing the number of shares outstanding tenfold and reducing the price per share by a proportional amount.

The split took effect on July 12, so investors can now buy a single Broadcom share for just $162 at the time of writing. That represents an opportunity as the company’s growing presence in artificial intelligence (AI) could continue to fuel growth.

A multi-faceted AI company

Broadcom has made a significant push into AI across its organization over the past year to capitalize on one of the most valuable technology revolutions in history.

On the semiconductor side, Broadcom makes data center accelerators, which are chips specifically designed for AI development. It also supplies data center networking equipment, including Ethernet switches, which regulate the speed at which data moves from one point to another. High-quality switches are crucial to AI infrastructure because data must flow quickly through tens of thousands of graphics processing units (GPUs) and accelerators.

In the most recent third quarter of fiscal 2024 (ended Aug. 4), Broadcom reported that its custom AI accelerator business grew three-and-a-half times from the year-ago period, driven by growing demand from hyperscalers (which typically include Microsoft, Amazon, and Alphabet). The company also reported that its Tomahawk 5 and Jericho3-AI switches delivered four-fold growth in sales compared to the year-ago period.

Beyond its semiconductor business, Symantec is weaving AI into its cybersecurity products. For example, earlier this year it launched SymantecAI, a chatbot capable of answering users’ questions about protecting their endpoints.

Then there’s VMware, which serves as a software layer in the data center, helping organizations optimize their infrastructure. They can use VMware to create virtual machines, meaning multiple employees can connect to the same server to utilize its full capacity. This ensures that no computing power is wasted, which is critical today given the shortage of powerful GPUs and data center hardware.

Broadcom expects to reach $51.5 billion in total revenue for its full fiscal 2024, which ends in late October. The company’s initial guidance suggested $11 billion of that would be attributable to AI across its businesses, but it just raised that guidance to $12 billion, underscoring the significant momentum in this emerging space.

Broadcom’s (Mathematical) Path to the Trillion Dollar Club

As I mentioned at the beginning, Broadcom’s market cap currently stands at $761 billion, so its stock would only need to rise 31.4% for the company to enter the trillion-dollar club.

The company isn’t consistently profitable on a GAAP basis, so it can’t be valued using the traditional price-to-earnings (P/E) ratio. However, we can value it using the price-to-sales (P/S) ratio, which divides its market capitalization by its annual revenue.

Broadcom currently trades at a P/S ratio of 16. If that number remains constant, the company simply needs to grow its annual revenue by 31.4% to justify entering the $1 trillion club. Wall Street expects Broadcom’s revenue to grow 17.2% in fiscal 2025, which won’t be enough, but it could reach that level in fiscal 2026 if it manages to grow by that amount again.

There is one caveat: While Broadcom’s P/S has come down from its peak of around 19, it is still very expensive compared with an average of 8.7 over the past five years:

AVGO PS Ratio Data by YCharts

It’s clear why investors are willing to pay a premium for the stock right now—Broadcom’s AI semiconductor products are delivering explosive growth and its acquisitions are adding a ton of value. But there’s no guarantee investors will be receptive to such a high P/S ratio over the long term, and a decline toward the five-year average could add years to Broadcom’s quest to join the trillion dollar club.

So while Broadcom will be a spectacular stock to own during the AI ​​revolution, investors should take a very long-term view (perhaps a decade or more) if they buy it today. That will give the company plenty of time to grow to its current valuation.

John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board. Suzanne Frey, chief executive officer at Alphabet, is a member of The Motley Fool’s board. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Anthony Di Pizio has no ownership interest in any of the stocks mentioned. The Motley Fool owns shares in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long $395 January 2026 call options on Microsoft and short $405 January 2026 call options on Microsoft. The Motley Fool has a disclosure policy.