To The Moon

$Broadcom(AVGO)$ Is one of my favorite dividend growth stocks, Broadcom, surged by an impressive 20.5% in a single day following the release of its latest quarterly earnings report. Looking at its performance over the past year, Broadcom is now up over 103%. Year-to-date, it has climbed more than 95%. Notably, in my growth portfolio, Broadcom is my top-performing position, showing gains of 328%.

Breaking Down Broadcom’s Latest Earnings Report

For Q4, Broadcom reported non-GAAP earnings per share of $14.02, which beat expectations by 3 cents. Revenue matched forecasts, coming in at $14.06 billion. While the earnings beat was modest, the key takeaway is Broadcom's impressive 51.2% year-over-year revenue growth.

To put this in perspective, Broadcom's 2024 revenue reached $51.5 billion, a sharp increase from $35.8 billion in 2023. This growth continues the company’s trend of rapid expansion, with a 10-year revenue CAGR of 28.3%.

Why the Share Price Spiked

Several factors contributed to the stock’s significant jump:

Revenue Segments Growth: Broadcom operates through two primary revenue segments: Semiconductor Solutions and Infrastructure Software. While Semiconductor Solutions continues to grow steadily, Infrastructure Software revenue saw a substantial leap from $1.97 billion in Q4 2023 to $5.82 billion in Q4 2024. This growth is largely driven by Broadcom's expansion into AI.

AI Revenue Growth: At the end of 2023, Broadcom had projected AI-related revenue to account for 25% of Semiconductor Solutions revenue. However, they exceeded expectations, reaching 35% for the year.

Partnership with Apple: Broadcom recently secured a deal with Apple to produce AI server chips, with deployment expected in 2026. If Apple allocates just 1% of its revenue to this chip, it could translate to nearly $4 billion in additional revenue for Broadcom.

Positive Guidance: Broadcom provided Q1 2025 revenue guidance of $14.6 billion, surpassing analysts’ expectations of $14.06 billion.

Evaluating Profitability and Growth

Despite a drop in earnings per share for 2024, this decline is not a concern for two key reasons:

Increased R&D Spending: Broadcom significantly boosted its research and development expenses in 2024 to support future growth, a strategic move for a high-growth company.

New Share Issuance: While issuing new shares can typically be a red flag, in Broadcom's case, it helps fund growth initiatives. The added capital supports further R&D, which should lead to sustained long-term growth.

Dividend Growth: A Compelling Story

Broadcom announced an 11.3% increase in its dividend, continuing its streak of robust dividend hikes. The company's 3-year dividend CAGR is 13.5%, the 5-year CAGR is 14.7%, and the 10-year CAGR stands at a remarkable 34%. While the current dividend yield is 1.17%, my personal yield on cost for Broadcom is 4.08%, and it will rise further with the new dividend increase.

If you had invested in Broadcom 10 years ago, your yield on cost would now be 21.7%. A 12-year investment would result in a yield on cost of 67.6% — illustrating the power of dividend growth fueled by strong free cash flow.

Valuation Considerations

At its current price of $250 per share, the market is pricing in free cash flow growth of around 20.3% annually. Given Broadcom's potential in the AI market and projected earnings growth of 27.3%, 19%, and 16% over the next few years, this growth expectation seems reasonable. Buying pressure is being driven by optimism rather than cautious analysis.

Market Sentiment

Broadcom's (AVGO) recent price action and growth trajectory are definitely driving market sentiment and fueling FOMO (Fear of Missing Out) among investors. Broadcom is riding the wave of the AI revolution, with AI-related revenue surpassing expectations (35% of Semiconductor Solutions revenue in 2024, up from a 25% target). The company’s partnerships, including the Apple AI server chip deal, are adding to the excitement.

With tech and semiconductor stocks leading the market, Broadcom’s positioning in AI infrastructure and software aligns it with the broader market rally in tech. Broadcom’s unique combination of semiconductor and infrastructure software growth makes it a standout pick. This scarcity increases demand among investors looking for a diversified AI exposure. Broadcom's 20.5% jump in a single day post-earnings and over 103% gain in the past year are classic signs of investors rushing in.

Conclusion

Despite debates about selling Broadcom at various price points, I’m confident in holding my shares long-term. The combination of high free cash flow growth, expanding AI opportunities, and consistent dividend growth makes Broadcom a standout dividend growth stock.

FOMO is natural, especially when a stock like Broadcom is hitting all-time highs and capturing market attention. However, sound investing decisions are driven by research and discipline, not emotion. Whether you decide to invest in Broadcom or not, remember that there will always be opportunities in the market.

What are your thoughts on Broadcom’s future?