Meet This Artificial Intelligence (AI) Giant Billionaires Are Buying Hand Over Fist That One Wall Street Analyst Thinks Could Soar Nearly 50% Next Year

Retail investors today have access to a large amount of information about public companies. Not only do we get quarterly reports to update us on how companies are doing, but there are also resources that show us what others' opinions are on any given stock. Two of the more useful types of information are analysts' stock price targets and the reports that show what assets hedge funds have been buying and selling.

Using those in tandem while you're researching stocks can help you gauge whether or not your views about a company are in the ballpark of the general consensus. One stock that has recently caught my eye -- as well as the eyes of analysts and hedge funds -- is Broadcom (NASDAQ: AVGO). The giant company has a wide reach in tech, but its significant footprint in the artificial intelligence (AI) space is what has been making it a hot stock.

The smart money is bullish on Broadcom's stock

In the third quarter, some prominent hedge fund managers bought shares of Broadcom. For example, Tiger Global Management (led by billionaire Chase Coleman) increased its stake in Broadcom. Bridgewater Associates, which was founded by billionaire Ray Dalio (though he only sits on its board now) nearly quadrupled its stake.

Wall Street analysts are optimistic about the stock too. Rosenblatt put a Street-high price target of $240 on it --about 50% higher than its current price. The average 12-month price target among the 42 analysts covering Broadcom is $193, predicting a more modest 19% gain. But that's still a strong performance that could easily beat the market.

Two primary factors influencing hedge funds' and analysts' views on the stock are the company's AI-related products and its VMware software.

Broadcom's AI product line is in high demand

Broadcom has its fingers in the AI game in multiple ways, but the most prominent are its ethernet switches and custom AI accelerators. Its Tomahawk 5 and Jericho3-AI switches direct traffic in AI servers, and are critical hardware for any company building out computing infrastructure upon which to train AI models. Demand for these products was off the charts last quarter, with sales increasing by 300% year over year. Sales of AI accelerators -- custom products designed specifically for an end-user to set up AI models in a certain way -- increased by 250% year over year. Demand for both of these products is expected to increase.

On the software side, the integration of VMware has greatly boosted Broadcom's business. Broadcom purchased VMware for $69 billion in November 2023, and it has thus far proven a great acquisition. VMware provides software that allows its clients to create virtual desktops, which helps maximize a company's computing resources. Because VMware hasn't been part of the company for more than a year yet, its addition to the quarterly picture is skewing Broadcom's year-over-year growth metrics.

So, for example, in its fiscal Q3, which ended Aug. 4, Broadcom's revenue grew 47% year over year to $13 billion. While that seems impressive, if you strip out VMware's contribution, its revenue only rose 4%. Given the success of Broadcom's AI product line, that low growth rate may seem odd, but its catalog is highly diversified, and most product areas not related to AI have been struggling.

Still, that hasn't stopped investors from being bullish about the stock -- Broadcom's share price has climbed steadily throughout 2024. The stock currently trades for 26 times forward earnings, which places it in a similar valuation range as Meta Platforms (NASDAQ: META), Taiwan Semiconductor (NYSE: TSM), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

AVGO PE Ratio (Forward) data by YCharts

Investors must ask themselves if Broadcom looks like a better investment than any of these other three AI plays. In my opinion, they all present far better opportunities for value and growth, but that could easily change if growth for Broadcom's AI product line remains strong and the rest of its business accelerates.

Broadcom will likely be another strong AI investment, but it's already fairly similar to other companies I'm invested in, so I will likely pass on the stock unless something changes drastically about the business's performance.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.