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History Says The Nasdaq May Soar In 2025: 1 Stock-split Ai Stock To Buy Ahead Of The New Year
The Nasdaq Composite (NASDAQINDEX: ^IXIC) has advanced 34% year to date, and history says that momentum may carry into 2025. Since its inception in 1971, the Nasdaq has returned at least 20% in 20 years, and at least 30% in 12 years. After those performances, the index typically generated strong returns in the next 12 months, as detailed below:
- After a 20%-plus gain in a calendar year: The Nasdaq has returned an average of 17% during the next year.
- After a 30%-plus gain in a calendar year: The Nasdaq has returned an average of 19% during the next year.
In short, if the Nasdaq returns at least 30% this year, history says the index will add another 19% next year if its performance aligns precisely with the average. Of course, past results never guarantee future performance. But there is no in harm leaning into trends, so long as the goal is long-term capital appreciation.
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With that in mind, Broadcom (NASDAQ: AVGO) completed a 10-for-1 stock split in 2024 after substantial share price appreciation, but 85% of Wall Street analysts that follow the company still rate the stock a buy.
Broadcom has a strong market presence in networking chips and custom AI accelerators
Broadcom breaks its business into two segments: semiconductor solutions and infrastructure software. It earns semiconductor revenue by developing chips for Ethernet networking, server and storage connectivity, and mobile devices. The company also builds custom artificial intelligence (AI) chips for select customers. Meanwhile, Broadcom earns software revenue from mainframe, cybersecurity, and virtualization products.
The bad news is that Broadcom's legacy businesses -- think mainframe software and non-AI semiconductors -- are expected to grow relatively slowly. The good news is Broadcom has a strong presence in several high-growth industries: It is the leader in Ethernet switching and routing chips, and custom AI chips. Specifically, the company has 80% market share in data center networking chips, and 60% share in custom AI accelerators, according to analysts.
AI accelerator spending is projected to increase at 29% annually through the decade's end, according to Grand View Research. That number includes graphics processing units (GPUs) from Nvidia, and custom AI chips from companies like Broadcom and Marvell. But custom AI silicon sales are expected to outpace (but not overtake) GPU sales during that period. That bodes well for Broadcom given its market dominance.
In software, Forrester Research has recognized Broadcom subsidiary VMware as a leader in hyperconverged infrastructure (HCI), a technology that virtualizes data center compute, storage, and networking. HCI lets businesses manage IT infrastructure more efficiently across on-premises data centers and hybrid clouds. The HCI market is expected to grow at 23% annually through 2030, according to Grand View Research.
Broadcom's fourth-quarter report reenergized the stock
Broadcom reported reasonably good financial results for the fourth quarter of fiscal 2024, which ended in November. Revenue increased 51% to $14 billion, though the acquisition of VMware (which occurred in the first quarter) contributed 40 percentage points to growth. In other words, organic revenue increased 11%. Meanwhile, non-GAAP net income increased 28% to $1.42 per diluted share.
However, management's commentary sent shares soaring following the report. Broadcom currently designs custom AI chips for three hyperscale companies -- reportedly Alphabet, Meta Platforms, and TikTok parent ByteDance -- and management expects revenue from those customers to reach $60 billion to $90 billion in fiscal 2027. That represents at least fivefold growth from the current base of $12.2 billion in fiscal 2024.
Additionally, CEO Hock Tan told analysts on the fourth-quarter earnings call that two more hyperscalers are likely to become customers in the near future. He did not provide names, but several analysts suspect they are Apple and OpenAI. Any revenue from those customers would be in addition to the range previously provided, meaning Broadcom could see a massive increase in AI chip sales in the next three years.
Broadcom shares are expensive, but still worth buying for patient investors
Looking ahead, Wall Street expects Broadcom's adjusted earnings to increase at 21% annually through fiscal 2027. That makes the current valuation of 51 times adjusted earnings look expensive, but patient investors comfortable with risk can still buy a small position today.
I say that because forward earnings estimates do not account for potential customers like Apple and OpenAI, which means Broadcom's earnings may increase more quickly than analysts anticipate. And upward earnings revisions tend to drive share price appreciation.
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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. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
