Broadcom (NASDAQ: AVGO) and Shopify (TSX: SHOP) are two tech stocks that have delivered market-thumping gains to investors as publicly listed companies. Broadcom went public 15 years ago and has since returned over 14,000% to investors after including dividend reinvestments. Comparatively, Shopify was listed on the TSX in May 2015 and has been up 3,160% in the last nine years.
However, these two large-cap millionaire maker tech stocks still have plenty of room to run. Let’s see why.
Is Broadcom stock still undervalued?
Broadcom is among the largest companies globally, valued at $771 billion by market cap. It reported revenue of US$12.49 billion and adjusted earnings per share of US$10.96 in the fiscal second quarter (Q2) of 2024 (ended in April), easily surpassing Wall Street estimates. The chipmaker now forecasts fiscal 2024 sales at US$51 billion, which is higher than estimates of US$50.42 billion.
Broadcom is a semiconductor giant poised to benefit from the artificial intelligence (AI) megatrend as its devices run AI applications. In the quarter ended April, Broadcom emphasized that revenue from AI products totalled US$3.1 billion, accounting for 25% of total sales.
“Talking of AI accelerators, you may know our hyperscale customers are accelerating their investments to scale up the performance of these clusters,” Broadcom chief executive officer Hock Tan said on the earnings call. “And to that end, we have just been awarded the next-generation custom AI accelerators for these hyperscale customers of ours.”
Broadcom’s acquisition of VMware allowed it to increase revenue by 43% year over year in fiscal Q2. If we adjust for organic sales, top-line growth stood at 12% in the April quarter.
Broadcom also pays shareholders an annual dividend of US$2.10 per share, indicating a forward yield of 1.3%, which might not seem attractive. However, these payouts have risen by 30% annually in the last decade, enhancing the effective yield over time.
In the last 12 months, Broadcom’s free cash flow has risen to US$21.96 billion, or US$4.24 per share, up from US$13 billion or US$2.81 per share in fiscal 2020. This means AVGO has a sustainable payout ratio of less than 50%. Despite its stellar returns, AVGO stock is priced at 30.5 times, which is not too expensive, making it an attractive investment in 2024.
The bull case for Shopify stock
Valued at $98 billion by market cap, Shopify trades over 50% below all-time highs. While investors were concerned about the company’s valuation in 2022, its focus on improving operational efficiency has fueled earnings growth higher in recent quarters.
Shopify provides a portfolio of products and solutions that enable merchants to run and optimize their online businesses. Over the years, Shopify has expanded its product portfolio to include digital marketing, advertising, and payment processing, resulting in higher customer engagement rates.
Moreover, its free cash flow has improved to US$770.5 million in the last 12 months, compared to US$232 million in 2022. According to consensus estimates, the Canadian tech stock is on track to report earnings per share of US$7 in 2028, up from just US$1 in 2023. So, if SHOP stock is priced at 30 times forward earnings, it should trade around US$200 in August 2028, indicating an upside potential of over 100% from current levels.
