By Lucas Downey, TradeSmith, Trades Of The Day, 2024-06-20
The term “AI” gets thrown around a lot these days.
It's easy to see why. The finance world is absolutely in love with its promises of automation and instant workflow enhancements.
Without question, this transformational technology will continue to change the world.
And as I see it, it's a winner-take-all moment. Just a handful of companies are truly profiting from this monumental point in history.
If there's a small number of winners… that means there's going to be ton of hyped-up pretenders that'll fail to live up to overzealous expectations.
And this is where the massive investment opportunity exists. You have to find the few outlier companies set to thrive in the years ahead.
That's why today, we're going to dive into one of my all-time favorite stocks that exhibits the three rare superstar qualities of a true AI champion.
If you recall, back in October of last year, I highly recommended Deckers Outdoor (DECK) as a superstar name to be on alert for.
Its revenue growth, earnings growth, and institutional support profile gave it an A+ rating in my book… And it's surged 72% since that post.
Today's all-star stock includes all these traits and more. So if you're looking for an under-the-radar AI name to add ahead of a stock split, keep reading…
Broadcom (AVGO) Is Shaping Up To Be A Holy Grail AI Stock
Rarely do I throw around the words holy grail when discussing potential stock investments.
However, when you study the fundamental picture of semiconductor behemoth Broadcom (AVGO), their underlying business is one of the best out there.
Their business can be broken down into two segments: infrastructure software and semiconductor solutions.
On the semiconductor side, they're a big player in networking, server storage, wireless, and more. On the infrastructure side, think mainframes, cloud, and cybersecurity.
They're positioned for monster growth ahead, which we can understand based on their latest second-quarter earnings report.
Quarterly revenue surged to $12.49 billion, easily outpacing the $12.06 billion estimates. They even hinted that AI revenue for 2024 should exceed $11 billion. That pleased Wall Street…
Just as pleasing was the fact that Broadcom announced a breathtaking 10-for-1 forward split.
Just two weeks ago we featured a study on stock splits that points to forward gains for the shares.
AVGO is following that same playbook as its announcement sent the shares into the stratosphere:
You'll note that the latest spike is a continuation of a trend that's lasted for many years. Broadcom has enjoyed a 641% return in the last 5 years.
Where did this stellar performance come from?
Here are the three pillars that make this AI juggernaut a superstar-quality stock…
Reason No. 1: Revenue And Profit Growth
The simplest way to find the top brass in the market is to isolate companies where business is booming. Even better, make sure the revenue growth is falling to the bottom line.
AVGO has experienced unprecedented sales and earnings growth over the past few years. From 2020 to 2023, sales ballooned from $23.9 billion to $35.8 billion.
But what makes this business even more attractive is the net income growth. In 2020, net income stood at $2.96 billion and grew nearly fourfold to $14.1 billion in 2023.
Those are rockstar stats. But it gets better… a lot better.
The forward picture is causing the breakneck rip in the share price. 2024 is expected to show a surge in net income, lifting to $23.2 billion.
And 2025 estimates aren't a slouch, coming in at a red-hot $29.3 billion! That's more than double where income stood in 2023:
Few AI companies can ever come close to this high-quality business profile.
But what puts this company in a league of its own is what they do with all these profits…
Reason No. 2: Fabulous Dividend Growth
You guys know I get excited about dividends. Not only do they buffer portfolios in times of distress, but they also are responsible for nearly 40% of the market's gains over decades.
Investing without dividends is never something I could recommend. But it matters which dividend stocks you pick.
AVGO is a prime example of the key dividend metric that matters: continual dividend raises.
This is what Warren Buffett teaches. Rarely do you find a growth stock packing dividend growth all in one package. But Broadcom does this in spades.
From 2010 through 2023 and beyond, Broadcom has seen its annual dividend grow from $0.07 per share to the 2024 estimate of $21 per share.
To put this into context, when they first initiated their dividend, the share price stood at $28.88. Over Broadcom's history through June 2024, investors have received $105.96 in dividends for every share they own!
2024's estimated dividend payments of $21 are about 73% of what the share price was when they started paying investors.
Imagine all of the compounding you can do with that level of reinvestment:
We could simply end here based on the business and dividend growth. But there's one more metric I need to see before greenlighting an investment.
Reason No. 3: A Rock-Solid Quantum Score
The Quantum Score is Jason Bodner's proprietary measure of a company's fundamentals, institutional support, and technicals.
This reading only flashes green when a firm has the best forward growth profile and technical attributes.
Here we can see AVGO has both fundamentals and technicals easily in the buy zone:
The fundamental score of 66.7 coupled with a technical rating of 91.2 leads to a Quantum Score of 81. These tell me that now's a great time to own this leading name.
Yes, I like the AI angle of Broadcom. But I love the outstanding job that management has done for investors over the years.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
Source: TradeSmith
The post This Superstar AI Behemoth Is Still a Hot Buy appeared first on Trades Of The Day.
