We recently published a list of The 10 best technology stocks for long-term purchase. In this article, we take a look at how Broadcom Inc. (NASDAQ:AVGO) compares to other technology stocks.
An analysis of the technology industry
The technology industry is one of the key drivers of the global economy. According to MGI Research, the global technology industry was worth $8.51 trillion in 2022 and is expected to grow at a compound annual growth rate of 7.75% to reach $11.47 trillion by 2026. In the United States alone, the information technology industry drives more than a third of the national economy.
One of the latest trends in the technology industry is the increasing investment in artificial intelligence by both tech giants and startup companies. According to a July 3 report by Reuters, venture capital funding in the U.S. rose to $55.6 billion in the second quarter of 2024. The funding increased by more than 47% quarter-on-quarter and was mainly driven by significant investments in artificial intelligence companies, including $6 billion raised by Elon Musk’s xAI.
However, in recent months, the technology sector has experienced a massive sell-off due to what analysts are calling the “AI bubble.” The sell-off began as investors raised concerns about the return on capital as they paid big bucks to invest in artificial intelligence. On August 5, CNBC reported that the “Magnificent Seven” of U.S. technology companies collectively lost a trillion dollars in market value at the start of the trading day. As a result, the NASDAQ lost 3%, marking the index’s sharpest three-week decline in two years.
We recently looked at the AI technology bubble in detail in 10 tech stocks to watch amid market volatility, according to Bernstein analystHere is a short excerpt from the article:
“Over the past few weeks, a massive sell-off in the technology sector, driven largely by concerns about return on capital amid exploding capital spending on artificial intelligence (AI), has rocked equity markets. Valuations have plummeted and fears have been stoked of an AI bubble in the market that may be about to burst. However, Stacy Rasgon, who has been tracking semiconductor stocks, one of the most significant sectors in the AI world, for over 15 years, has advised investors to stay the course, calling fears of a bubble overblown. Rasgon claims that while the probability of a bubble, used to describe stock price crashes, is 100%, he is convinced that now is not the time for it. He pointed to the very real and massive construction of an AI data center as an example, predicting that it would last for a few years, which would help drive AI stocks higher.”
Michael Landsberg, CIO of Landsberg Bennett Private Wealth, spoke about the AI bubble in a CNBC interview. He believes that the AI bubble has not burst yet and that we have seen a market reset recently where the market is resetting out of sync factors, which does not mean that analysts are not positive about AI. He added that many AI companies have had great results in the last six months and are growing their earnings. He believes that ultimately earnings drive any stock and as far as AI stocks are concerned, their earnings are growing and will continue to grow, which increases the price.
Furthermore, in another CNBC interview, Steve Eisman, Senior Portfolio Manager at Neuberger Berman, referred to the recent events as a “psychological rotation.” He mentioned that it was not a fundamental rotation that could have been problematic, but rather a psychological rotation that will not last long. He further mentioned that artificial intelligence will be with us for years to come and he still sees tremendous growth opportunities for companies investing in AI.
Our methodology
To compile the list of the 10 best technology stocks to buy for the long term, we used Finviz and Yahoo Finance’s stock screeners. We searched for technology stocks and sorted them by their market capitalization. From these stocks, we selected technology stocks that have been in business for 20 years or more and are expected to stay in business for several decades. Once we had the consolidated list, we evaluated the stocks most held by institutional investors in the second quarter of 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care what hedge funds do? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (Further details can be found here).
A technician works on a magnifying microscope and develops a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
Number of hedge fund owners: 130
Broadcom Inc. (NASDAQ:AVGO) is a technology company that sells various semiconductor products used in various everyday electronic devices. The company sells system-on-chips that integrate multiple functions on a single chip, networking chips for home and enterprise network use, and radio frequency components critical to communications and GPS systems.
Broadcom Inc. (NASDAQ:AVGO)’s technology application runs on nearly every electronic device in your home, from your televisions to sophisticated industrial applications. The stock was held by 130 hedge funds in the second quarter of 2024, with a total value of $20.04 billion, making it one of the best technology stocks to buy for the long term. GQG Partners is the company’s largest shareholder with a position valued at $5.19 billion.
The company reported a strong second fiscal quarter of 2024. Its revenue increased 43% year-over-year to $12.5 billion. The revenue growth was driven by the company’s rising AI revenues, which grew 280% year-over-year to $3.1 billion.
One of the strategic moves by management that has contributed significantly to the company’s success is the integration with VMware, known for cloud and visualization technologies. The integration means that VMware now sells its product line under the Broadcom brand name. As a result, more than 3,000 of Broadcom Inc.’s (NASDAQ:AVGO) top customers already use VMware products, contributing significantly to the company’s revenue.
We have already witnessed the company increase its revenues in the AI segment. Going forward, management is in talks with leading AI companies like OpenAI to develop custom AI processors, which will provide the company with another solid revenue stream.
Over the last decade, Broadcom Inc (NASDAQ:AVGO) has grown its revenue and net income by 31% and 33%, respectively. This shows that the company is capable of delivering long-term growth across all areas while maintaining a strong liquidity position, as its levered free cash flow has also grown by 48% over the last 10 years.
Although AVGO trades at a premium to its sector, it can still be a worthwhile option for growth investors, as its earnings are expected to rise 22.5% to $1.36 for the year. In addition, analysts believe that Broadcom Inc (NASDAQ:AVGO) has the potential to become a trillion-dollar company. The company has gained an average of 40% over the past five years, and at that rate, it would need another robust year of growth to become a $1 trillion company.
Baron Opportunity Fund stated the following about Broadcom Inc. (NASDAQ:AVGO) in its second quarter 2024 investor letter:
“Broadcom Inc. (NASDAQ:AVGO) is a leading global technology company that designs, develops, and delivers a broad range of semiconductor and infrastructure software solutions. The stock rose during the quarter as the company reported strong earnings from its two key growth drivers, AI semiconductors and its acquired VMware software business. The company again raised its guidance for AI-related revenue and now expects $11 billion or more this year (up from the previous guidance of $10 billion), due to strength in both hyperscale custom computing and networking chips, where Broadcom maintains its dominant share. In the networking space, Broadcom’s solutions are critical to scaling AI training factories to 100,000 chip clusters in the near future and 1 million chip clusters in the coming years. In AI Custom Computing, Broadcom is developing custom accelerators for large consumer Internet AI companies (such as Google and Meta) that are building ever-larger AI clusters to improve user engagement and targeted advertising on their consumer media platforms. VMware remains on track to continue its rapid sequential growth while reducing operating costs. This is leading to faster-than-expected margin expansion and gains as management has simplified the product offering and shifted customers from a licensing model to subscriptions. We believe VMware will exceed its near-term quarterly target of $4 billion, well above current analyst expectations. These two factors combined have led to a reassessment of the growth profile for the entire company. To quote CEO Hock Tan, “There is only one Broadcom. Period.”
Total AVGO takes 8th place on our list of the best technology stocks to buy for the long term. While we recognize AVGO’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than AVGO but trades at less than 5x earnings, read our report on the cheapest AI stock.
READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.
Disclosure: None. This article was originally published on Insider Monkey.
