Seven of the world’s top technology stocks have recently been dubbed “The Magnificent Seven.”

Of course, the definition of the market’s elite stocks keeps changing. After all, this vaunted group used to be called the FAANG stocks, until Netflix dropped out and Nvidia and Microsoft displaced it.

So which company outside the Magnificent Seven has the potential to displace one of its current members? One tech giant seems like a strong candidate, especially since it’s already larger than Tesla and just made a potentially transformative acquisition.

The stock in question is Broadcom, which is up 11% this year to reach an impressive market cap of $575 billion, making it the 13th largest company in the world today, and the 12th largest if one excludes Saudi Aramco.

Unlike the Magnificent Seven, Broadcom has assembled its current roster of businesses mainly through acquisition. CEO Hock Tan has been a master of the strategy, buying high-quality but bloated tech businesses, then folding those franchises into Broadcom’s corporate umbrella.

Yet while that strategy may be a tad different from other Magnificent Seven stocks that primarily grew organically before making larger acquisitions later on, Broadcom shares a number of qualities with the other Mag Seven companies: strong competitive moats, high margins, technology innovation, and a platform likely to benefit from generative AI.

Like some Magnificent Seven stocks, Broadcom may be wholly unique among tech stocks. That’s because after its massive acquisition of VMware in October, the company is now almost equally diversified between semiconductors and software. Prior to the closing of VMware, Broadcom generated less than 25% of revenues from software, and was primarily known for its leading semiconductors for networking and communications.

There aren’t many companies that are equal weight software and semiconductors – usually companies are either on the hardware or the software side. But with a new emphasis on software, Broadcom may really turn some heads. And that’s doubly true if VMware’s new hybrid cloud platform takes off as much as management proclaims.

On the first quarter conference call with analysts, management noted it expects VMware’s revenue to grow double-digits sequentially in each quarter this year. This obviously amounts to at least 40% growth for VMware in fiscal 2024. That’s stunning, as VMware really wasn’t growing its top-line that fast prior to the acquisition. In fact, in the quarter prior to the acquisition, VMware grew revenue only 2%.

However, Broadcom’s upselling strategy appears to be working with help from VMware’s new virtualized AI product called the VMware Cloud Foundation (VCF). VCF virtualizes large enterprises’ data centers, including compute, storage, and networking, giving large corporations a “cloud-like” experience with their on-premises data centers.

Besides the much-improved software offerings, Broadcom has two high-growth AI hardware businesses. One is in networking, where Broadcom dominates switch and router semiconductors through its Tomahawk and Jericho chipset brands.

The second AI business going gangbusters right now is Broadcom’s custom ASIC (application-specific integrated circuit) business. In this business, Broadcom contributes its IP to third-party AI chips, such as Alphabet’s Tensor processing units. With basically all the cloud computing giants now looking to design their own in-house AI chips, this business is seeing very strong growth today.

Broadcom’s other businesses don’t have the eye-opening growth prospects of AI chips, but they do have strong franchises and high margins. For instance, Broadcom has a strong partnership with Apple, making radio frequency and wireless connectivity chips for the iPhone.

Currently, Broadcom trades around 26 times this year’s earnings estimates, and it pays a 1.7% dividend. That would put Broadcom toward the lower end of valuations for the Magnificent Seven stocks, and would also make it the one with the highest

Room for Growth Beyond Analyst Estimates

Amid discussions of dividend yield, Broadcom emerges as a beacon of potential. Analyst earnings estimates may be deemed too conservative, given Broadcom’s consistent track record of outperforming projections. The company’s proactive approach to revising its AI revenue outlook upwards reflects a stance that hints at management’s latent ambition.

Diversification and Acquisition Strategy

Having VMware under its umbrella, Broadcom transcends its identity as a mere chipmaker to that of a tech conglomerate with a diverse array of platforms. This strategic expansion broadens Broadcom’s horizons for potential acquisitions in both hardware and software domains, thereby enhancing its avenues for future growth.

The Road to Magnificent Seven or Elite Eight

Given a substantial portion of its business aligned with AI growth, the prospect of Broadcom transcending into the ‘Magnificent Seven’ or even expanding the category to an ‘Elite Eight’ appears tantalizingly plausible. Such aspirations unveil Broadcom’s evolving journey amidst a landscape ripe for opportunity.

Investment Considerations

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Disclosure and Reflections

As the landscape unfolds, it is noteworthy that Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Reflecting on individual perspectives, Billy Duberstein holds positions in tech giants like Alphabet, Apple, Broadcom, Microsoft, and Netflix, among others. This disclosure provides a glimpse into the diversified portfolio landscape, where strategic alignment plays a pivotal role.