1 Top Artificial Intelligence (AI) Chip Stock to Buy Hand Over Fist Before It Jumps
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Difficult Year for AI Semiconductor Stocks in 2025
2025 has been a difficult year for artificial intelligence (AI) semiconductor stocks so far, as the sector has been hit hard by a spate of negative news that has led investors to overlook the strong results that companies in this sector have been delivering. Broadcom, however, managed to buck that trend by handsomely crushing Wall Street's expectations and delivering solid guidance when it released its fiscal 2025 first-quarter results (for the quarter ended Feb. 2) on March 6. Shares of the chip designer jumped more than 8% the following day.
Current State of Broadcom Stock
What's worth noting is that Broadcom stock is still in the red this year, down 20% as of this writing. But the good part is that it can still be bought at an attractive valuation. Let's take a closer look at the reasons why investors are upbeat about Broadcom's latest results and check why this semiconductor stock is worth buying right now.
Broadcom's AI-Driven Momentum is Here to Stay
Broadcom is known for designing application-specific integrated circuits (ASICs), which are programmed to perform specific tasks instead of general-purpose computing. The demand for these customizable chips has increased thanks to growing demand for AI training and inference, as they carry a cost and performance advantage over graphics processing units (GPUs). This explains why major cloud service providers have been turning to Broadcom to develop custom AI processors to lower their AI infrastructure costs.
Broadcom's Performance and Future Prospects
The robust demand for Broadcom's AI chips and networking components was the biggest reason behind the 25% year-over-year jump in its revenue and the 45% spike in its earnings per share. The company sold $4.1 billion worth of AI chips and networking solutions last quarter, an increase of 77% from the year-ago period. Broadcom management points out that its AI revenue exceeded its expectations by $300 million last quarter on account of stronger-than-expected demand from its cloud customers.
Broadcom's Research and Development Efforts
As a result, the company is ramping up its research and development (R&D) efforts to churn out more capable custom AI processors to help its customers tackle bigger AI workloads. Broadcom points out that it currently has three hyperscale cloud customers using its AI chips. The company has aligned its R&D efforts with these three customers through fiscal 2027. That's not surprising, as Broadcom believes that they can open up a serviceable revenue opportunity worth $60 billion to $90 billion over the next three years.
Broadcom's Strategy for AI-Powered Growth
So, Broadcom's AI-powered growth is just getting started. The company is now getting just over 27% of its revenue from AI, but that figure is likely to move higher thanks to the huge addressable market that Broadcom sees in this segment. Not surprisingly, analysts have bumped their revenue growth expectations.
Impressive Stock Price Upside
The good news for Broadcom investors is that the growing mix of AI-related revenue is positively impacting margins. More specifically, Broadcom's gross margin from its semiconductor business increased by 70 basis points year over year last quarter, allowing the company to exceed its overall gross margin expectations. Given that Broadcom's AI business has immense room for growth, it won't be surprising to see the company's margin profile getting better. This explains why analysts are expecting Broadcom's earnings growth to accelerate.
Why Invest in Broadcom Stocks
With the stock trading at 30 times forward earnings right now, it isn't too late for investors to buy it. The tech-laden Nasdaq-100 index has an identical average earnings multiple. Assuming Broadcom manages to generate $9.12 per share in earnings after three years and still trades at a P/E multiple of 30, its stock price could hit $274. That would be a 48% increase from the stock price as I write this. However, this AI stock could deliver much stronger gains than that, as the market could put a premium on its valuation on account of its improving growth profile and the lucrative AI-focused opportunity it is sitting on. That's why savvy investors would do well to buy Broadcom stock before it soars even higher.