This Artificial Intelligence (AI) Stock Is Hot and Likely Won’t Slow Down | The Motley Fool

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Investors looking to profit from artificial intelligence (AI) should look closer at Broadcom (AVGO -2.17%). Amid name changes and a business focus, it escaped the notice of some investors.

Nonetheless, investors have many good reasons to pay closer attention, especially with its growing AI capabilities. Investors can benefit as it continues to derive increasing sales from AI. Here’s why it is not too late to profit from Broadcom stock.

Broadcom takes a different approach than its more consumer-focused peers. Instead of developing more general-purpose semiconductors, Broadcom employs engineers near its largest clients to create tailor-made chips to meet customer needs.

However, with the cyclicality of the chip industry and the opportunity in software, Broadcom began acquiring enterprise software and cybersecurity companies in 2018. Assuming the latest acquisition of VMware gains regulatory approval, over 40% of its revenue could come from software.

Additionally, its software and hardware capabilities help Broadcom boost its AI product offerings. It allows customers to improve security through its Symantec Data Loss Prevention Cloud. Also, its AIOps solution delivers insights from monitoring data for infrastructure, applications, networks, and user experiences.

And although it does not produce AI chips like Nvidia, many of Broadcom’s chips can support generative AI. Jericho3-AI, which Broadcom released in April, helps customers complete AI workloads at a faster pace. Moreover, its switch product, Tomahawk 5, can speed up data transfer between AI endpoints. With such products, Broadcom CEO Hock Tan believes AI can account for over 25% of Broadcom’s semiconductor revenue by 2024.

Despite its offerings, Broadcom has not offered the most obvious investment case for U.S.-based investors. It was less visible because of its focus on business customers, and its starting Singapore-based Avago Technologies made it hard to notice. Still, that situation has changed since it adopted the Broadcom name and moved its headquarters to San Jose, California.

And even with a market cap approaching $370 billion, investors can still profit from this stock. In the first three quarters of fiscal 2023 (ended July 30), it reported a net income of nearly $11 billion, a 33% increase compared with the same period in fiscal 2022.

Furthermore, shareholders earn an $18.40 per share annual payout, a dividend yield of 2%. In comparison, the S&P 500 yields around 1.6%. Also, the payout has risen every year since its introduction in 2010.

Last year, the dividend increased by 12%, and if history is an indication, the company will likely announce its next payout hike in December. Thus, investors should also keep Broadcom in mind as a growing source of cash.

Given that benefit and its AI capabilities, it will probably not surprise investors that Broadcom stock has doubled over the last year. And even with this increase, it supports a price-to-earnings (P/E) ratio of 27, a level one can argue is reasonable given its current earnings growth rate. Assuming the company can maintain a rapid pace of earnings growth, that and its AI capabilities should help investors formulate an investment case for this stock.

Ultimately, Broadcom is becoming a force in the AI space, one that can profit investors. Thanks to its significant presence in the hardware and software businesses, it has positioned itself well to capitalize on this technology.

Additionally, with all of the attention chip stocks like Nvidia receive, investors may not have noticed this stock. Thankfully, its AI-enhanced capabilities, earnings growth, and reasonable valuation could lead to both stock gains and rising dividends for investors in the coming years.

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