Almost unnoticed, a tech giant you've probably never heard of has edged Tesla out of the much-hyped Big Seven. Can Tesla still hold onto that spot?

The overlooked Big Seven is Broadcom, a tech company that makes both hardware and software. It's well-known in the information technology community, but not well-known outside of it. The Big Seven is a group of stocks envisioned as the most valuable U.S. tech companies by market cap at the start of 2023. In descending order, they include Apple (recent market cap: $3.4 trillion), Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla (recent market cap: $768 billion).

However, Broadcom's market cap surpassed Tesla's last spring and has been ahead of the electric car maker for much of this year. Its market cap is currently around $803 billion.

There's no guarantee that Broadcom will stay ahead of Tesla, at least in the short term. Tesla's stock price is notoriously volatile, and its market cap could exceed Broadcom's for some time. But Broadcom's long-term outlook is the more bullish of the two. Wall Street analysts, on average, expect its stock to keep rising, while they expect Tesla's to keep falling. Tesla's stock has fallen back to where it was nearly four years ago, while Broadcom's stock is up 290% since then.

So how did this obscure giant rise to the top of the tech world? Mainly because of its combination of technical savvy and financial savvy. The company is the grandchild of Hewlett-Packard, which spun off a company called Agilent Technologies in 1999, which in turn spun off a company called Avago to two private equity firms in 2005. Avago began buying semiconductor companies and in 2015 bought a big company called Broadcom, after which it was named.

Broadcom's PE pedigree has guided it ever since that spinoff. "Broadcom operates much like a PE firm, investing in assets that can deliver a quick return," said Naveen Chhabra, an analyst at Forrester Research and Consulting. It is "very savvy in investing in companies that can maintain or grow revenue" while "converting companies into high-margin businesses."

Exhibit A is Broadcom's largest acquisition, cloud computing company VMware, which it bought in November. A Forrester report for VMware clients warns them: "Don't let price increases scare you. In most cases, customers will see renewal quotes that are multiple times higher than what they paid in the past."

Wall Street has given Broadcom a thumbs-up to its overhaul. "They appear to be beating VMware," said Stacy Rasgon, an analyst at Bernstein. "VMware clearly beat expectations this quarter and appears poised to continue growing."

Savvy acquisitions and management are at the heart of Broadcom's growth, but they don't fully explain the company's astonishing market cap gain. Another key factor is the artificial intelligence boom, which is not surprising. One of Broadcom's most important businesses is designing semiconductors — computer chips — and demand has been high over the past year. BofA Securities reports that Broadcom had $4.2 billion in AI chip sales in fiscal 2023. The firm expects AI chip sales to surge to $12.1 billion this year and $16.9 billion next year.

Broadcom's chip expertise, combined with VMware's success, has propelled Broadcom's market cap from just above McDonald's when OpenAI released ChatGPT in November 2022 to one of the Big Seven today.

A key factor in Broadcom's success and future is CEO Hock Tan, who was hired to run the company when Avago was spun off in 2005. The 72-year-old was born in Malaysia and has an engineering degree from MIT and an MBA from Harvard Business School. He has spent most of his career at tech companies but has also held finance roles at PepsiCo and General Motors — so the company has shared expertise in both technology and finance. In recent years, Tan has been one of the highest-paid CEOs in the U.S., last year he made $162 million. Succession is an obvious issue for the company, but no successor has been identified. Tan said he will continue to run the company for at least four years.

Wall Street analysts are mostly bullish on Broadcom. "The numbers look likely to continue to rise," said Bernstein's Rasgon. "And the valuation looks increasingly attractive." JPMorgan's Harlan Sur said the stock "remains our top pick in the semiconductor space."

You can't be high, but for now this company is basking in the sun. Beyond that, the only certainty is that Broadcom can no longer remain in obscurity.

01 Will the market value exceed one trillion US dollars?

Broadcom is now just one step away from reaching the glorious $1 trillion market cap, as it only needs to rise by less than 30% to achieve this impressive feat. But can it do this in 2025? Let's find out.

Broadcom does so much that it's hard to summarize it all. It provides hardware and software solutions and chip design services to customers across a wide range of industries. On the hardware side, its network switches are in the spotlight, as these devices are essential for building data centers for training AI models.

On the software side, Broadcom's products allow companies to control their mainframe computers, which is essential in today's increasingly digital business environment. It also has cybersecurity software, but its biggest software products come from acquisitions.

Last year, Broadcom acquired VMware, which allows users to set up virtual desktops in the cloud. It was a successful acquisition and the main reason for Broadcom's latest quarterly revenue growth.

In the third quarter of fiscal 2024 (ending August 4), Broadcom's revenue increased 47% year-over-year to $13 billion. While that sounds impressive, what happened behind the scenes was far less impressive. If you remove the impact of the VMware acquisition (which did not contribute to the year-ago quarter), revenue grew just 4%. This is a major change that completely changes how investors think about Broadcom.

But that doesn't mean AI isn't helping Broadcom's business. CEO Hock Tan said during Broadcom's third-quarter earnings call:

As you know, our hyperscale customers continue to scale and expand their AI clusters. Custom AI accelerators grew 3.5x year-over-year. On the fabric side, Ethernet switching powered by Tomahawk 5 and Jericho3-AI grew over 4x year-over-year, while our optical lasers and thin chips for optical interconnect grew 3x.

If you break it down, this is incredible growth. Connectivity switches grew 400%, while custom AI accelerators (such as Alphabet's Tensor Processing Unit (TPU), which outperforms Nvidia GPUs in AI) grew 350%!

02 Divisions of Broadcom

These divisions of Broadcom are strong, the problem is that they are not a large percentage of the company's business, so these divisions have little impact. But this situation may change next year.

Wall Street analysts expect Broadcom's revenue to grow 17% year-over-year in fiscal 2025. This number includes the fully integrated VMware, so it accurately reflects the true revenue growth. In addition, earnings per share (EPS) are expected to increase from $4.82 this year to $6.17 next year, an increase of 28%.

If investors can buy the stock at a reasonable price, then this seems to be a good company to invest in. But Broadcom's forward P/E ratio of 35 times is a bit expensive.

Nvidia's valuation is also in the same level because it has a P/E ratio of 41 times and is growing faster. Therefore, investors must determine whether they need to find the next Nvidia in Broadcom or whether they should continue to hold Nvidia because its performance is still high.

Regardless, Broadcom is still moving towards a market value of $1 trillion. The average rating of 27 Wall Street analysts is buy, and they predict that the stock price will reach about $199 in one year. That's a 19% gain from today's price, but not nearly enough to reach the 30% growth needed for a $1 trillion market cap.

However, if Broadcom can achieve this level of stock performance, it could significantly outperform the broader market (as measured by the S&P 500), which typically grows about 10% per year, making it an excellent stock pick. If Broadcom grows 20% next year, it won't be far from the $1 trillion mark, and if it can keep up its growth momentum, it could very well reach that goal by 2026.

With demand for its AI products strong and growing, Broadcom should remain strong for years to come.

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