The Motley Fool: Consider Broadcom as AI spending continues to grow

Semiconductor chips are big business, present even in today’s refrigerators and automobiles. And as artificial intelligence (AI) infrastructure spending continues to grow, Broadcom (Nasdaq: AVGO) benefits from selling high-performance networking and customized AI chips for data centers.

Analysts forecast annualized earnings growth of about 41% for Broadcom over the next few years. That could support strong returns for the stock, as its forward-looking price-to-earnings (P/E) ratio was recently just 35.

A risk for Broadcom is that data center spending can be cyclical. Budgets can pause or dip, and those slowdowns could send the stock downward.

But a significant part of its business isn’t dependent on AI – such as infrastructure software and general-purpose semiconductor solutions. Broadcom provides non-AI connectivity and storage for wireless, broadband, industrial automation and networking, as well as non-AI infrastructure software for cybersecurity and enterprise software.

Nothing is guaranteed in the stock market. For Broadcom to meet expectations, AI spending will have to continue to grow rapidly, and the company must deliver on its innovation roadmap. However, if we’re still in the early innings of a multiyear AI infrastructure build-out, this stock could deliver huge long-term gains. (The Motley Fool owns shares of and recommends Broadcom.)

Ask the Fool

Q. What’s a payout ratio? – F.J., Winona, Minnesota

A. It’s the percentage of a company’s earnings (net income) that’s paid out to shareholders in the form of dividends. For example, Coca-Cola’s earnings per share (EPS) over the past year were recently $3.04, and its annual dividend per share was $2.12 ($0.53 per quarter). Divide $2.12 by $3.04 and you’ll get a payout ratio of around 0.70, or 70%.

A payout ratio above 100% suggests that a company is paying out more than it’s earning, which is not sustainable over the long run. (Accounting practices in some industries, such as utilities or telecommunications, can keep payout ratios high but less worrisome.)

A high payout ratio – say, 80%, 90% or more – gives a company little flexibility in how it can use its cash. That can be OK for big, established companies that don’t need to reinvest much in their businesses. A low payout ratio reflects much more room for dividend increases.

A very steep payout ratio is a red flag, as such companies may have to reduce their dividend. To see stocks we like, dividend payers and nonpayers alike, check out our articles at Fool.com and our investor services at Fool.com/services.

Q. What’s an 8-K report? – R.G., Dayton, Ohio

A. The Securities and Exchange Commission requires publicly traded companies to release certain financial reports quarterly. If something noteworthy happens between those reports that may affect the company’s health or performance, an 8-K, or “current report,” must be filed to keep shareholders informed. Events warranting an 8-K include a bankruptcy filing, a completed merger, a change in top leadership, layoffs or plant closures, among others. You can look up SEC filings at SEC.gov.

My dumbest investment

My most regrettable investing moves were (1) not taking Bitcoin seriously in 2013 and (2) not going all in on Tesla early in the COVID-19 era. – L.P., online

The Fool responds: Most experienced investors will have some investments they regret making and some investments they regret not making. Yours fall in the second group. But don’t kick yourself too hard, because you couldn’t have known for sure how these investments would have performed.

Bitcoin debuted in 2009 with a value near zero, and it stayed valued at under $0.30 per coin through 2010. In 2013, it surged from $13 to more than $700. More recently a single bitcoin was priced at over $75,000. It could keep surging, but it’s a complicated security; you should learn a lot about it – and its risks – before investing.

Tesla also skyrocketed, with shares rising 743% in 2020 and hitting a price-to-earnings (P/E) ratio above 1,300. Arguably, shares got way ahead of themselves, later falling by 65% in 2022.

It’s close to impossible to catch investments just before meteoric rises. Instead, seek promising, growing investments available at reasonable prices, and aim to hang on through thick and thin, as long as they hold your confidence.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)