Meet the Monster Stock that Continues to Crush the Market

Back in 2023, only 27% of the stocks in the S&P 500 outperformed the broader index. That ratio, which represented its lowest percentage in three decades, and only rose to 28% in 2024.

Those low percentages support the idea that it's smarter to invest in an S&P 500 index fund than to try to time and beat the market with individual stocks. However, some of those S&P 500 stocks which consistently outperform the market might still be worth buying as long-term investments.

One of those market-beating stocks is Broadcom (NASDAQ: AVGO), which was formerly known as Avago before it acquired the original Broadcom and inherited its brand in 2016. Over the past five years, Broadcom's stock surged more than 680% as the S&P 500 roughly doubled.

Let's see why this monster stock keeps crushing the market -- and why if it's still worth buying today.

Image source: Getty Images.

How rapidly did the "new" Broadcom grow?

Before Avago acquired the original Broadcom for $37 billion, it sold a wide range of wireless, storage, networking, optical, custom, and radio frequency chips. That "old" Broadcom competed against Avago in the storage and networking chip market, but it also sold a wider range of mobile, multimedia, and Wi-Fi/Bluetooth combo chips. The "new" Broadcom didn't produce any high-end chips, but its products remained essential for many enterprise, industrial, and mobile customers.

From fiscal 2016 to fiscal 2024 (which ended last November), Broadcom's revenue grew at a compound annual growth rate (CAGR) of 18.5%. A lot of that growth was driven by its big acquisitions -- which included the storage networking products provider Brocade in 2017, the mainframe and enterprise software provider CA Technologies in 2018, Symantec's enterprise security business in 2019, and the cloud software giant VMware in 2023.

Through those acquisitions, Broadcom evolved from a chipmaker into a more diversified tech company which generated 42% of its revenue from the infrastructure software business in fiscal 2024. The remaining 58% came from its semiconductor solutions business.

That diversification gives Broadcom more protection from the semiconductor market's cyclical downturns while increasing its exposure to the growing cloud and cybersecurity software markets. Data centers are also installing more of Broadcom's networking, optical, and custom accelerator chips to power their latest AI applications. Those catalysts are helping Broadcom grow much faster than other comparable chipmakers like Texas Instruments.

How much faster will it grow over the next few years?

In fiscal 2024, Broadcom's sales of AI-oriented chips surged 220% to $12.2 billion. That accounted for 41% of its semiconductor revenue and 24% of its total revenue. That growth offset its slower sales of non-AI chips and infrastructure software, while its total revenue -- boosted by its takeover of Vmware -- increased 44% for the full year.

In the first quarter of fiscal 2025, Broadcom's AI-oriented revenue surged 77% year over year to $4.1 billion and accounted for 27% of its top line. The company expects its AI sales to rise another 44% year over year to $4.4 billion in the second quarter. So while Broadcom doesn't produce high-powered data center GPUs like Nvidia, it's still clearly a major beneficiary of the AI boom.

Yet Broadcom's business isn't completely immune to the macro headwinds. Tariff-stricken companies could scale back spending on new AI, cloud, and cybersecurity services. Trade wars could disrupt its supply chains. Companies which rely heavily on overseas components and labor -- like its top chip customer Apple -- could buy fewer chips as those headwinds intensify.

From fiscal 2024 to fiscal 2027, analysts expect Broadcom's revenue to increase at a CAGR of 17% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which smooths out the impact of its recent acquisitions -- rises at a CAGR of 21%.

Is it the right time to buy Broadcom's stock?

With an enterprise value of $1 trillion, Broadcom's stock still looks reasonably valued at 24 times this year's adjusted EBITDA -- and it could continue to outperform the market as long as its AI business keeps expanding. The stock might remain volatile this year as the tariffs and trade wars rattle the markets, but it's still a promising long-term play for patient investors.

Should you invest $1,000 in Broadcom right now?

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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple, Nvidia, and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.