Last week, I added a new AI stock to my ISA. I invested in this company because its revenues are surging, its share price is in a strong upward trend (and breaking out to new all-time highs), and its valuation seems reasonable.
Interested to know the name of the company I invested in? Read on and I’ll tell you.
My new AI stock
The AI stock I bought was Broadcom (NASDAQ: AVGO), which makes custom AI chips for Big Tech firms and also offers networking solutions. I initially bought some shares near $430 and then added some more when they dipped below $410.
I’ve had this name on my watchlist for years now (I really should have bought it a long time ago) and came close to buying it in March when markets were down. After doing some more research on it the weekend before last, I decided that it was time to buy, despite the fact that it has jumped in price recently.
Why did I buy now?
As for why I bought it, there are numerous reasons.
One is that growth forecasts are incredibly strong. This financial year (ending 31 October), revenue is projected to grow about 65%.
Next financial year, analysts expect revenue growth of more than 50%. Note that profits are expected to grow massively over this period.
Another is the company is doing major deals with many of the big players in AI. In April, for example, it signed deals with Google, Meta, and Anthropic.
These deals signal that the company has some good technology. And they position the group at the heart of the AI boom.
I also like the fact that analyst sentiment is bullish. Recently, a number of firms have raised their price targets to $500 or higher.
Baird has the highest price target at $630. That’s more than 40% above the current share price.
The share price trend is another attraction. It’s upward in trajectory and as mentioned the stock recently broke out to new all-time highs (meaning that there is no one who is looking to breakeven and sell after sitting on losses).
Finally, the valuation seems reasonable to me. Looking at the earnings forecast for next financial year, the price-to-earnings (P/E) ratio is only 23.
What’s my strategy?
Now, there are risks here, of course. One is a slowdown in AI spending.
It’s worth noting that a lot of Broadcom’s revenues are coming from a handful of companies. If one of these businesses were to pull back on orders, the growth forecasts mentioned above could be obsolete.
Another risk is profit taking. Given that the stock is up about 90% over the last year (and 10% over the last month), there is always the chance of some profit taking.
I’m taking a five-year view here though (our preferred time horizon at The Twelfth Magpie). And over that timeframe, I see the potential for strong returns.
