Investing

Broadcom Soared 37% So Far This Year and Here Is Where It's Going

Chris MacDonald

Published: August 14, 2024 10:29 am

A correction in mega-cap tech stocks emerged as investors shifted from AI winners to small-cap stocks, anticipating potential Federal Reserve rate cuts. Jefferies analyst Brent Thill noted that while semiconductors and internet companies performed well, software lagged. Thill predicted a tech rebound in the year’s second half, with no signs of reduced software demand despite some semiconductors being overbought. 

Broadcom (NASDAQ:AVGO), a top AI chipmaker, reported a record $3.1 billion in AI revenue, contributing to a 43% year-over-year increase in Q2 FY24 revenue. The company’s VMware acquisition bolstered its infrastructure software business, with more companies integrating VMware for private cloud solutions. 

Broadcom’s CEO Hock Tan often uses blog posts for strategic updates and crisis management. While its products, like RAID controllers and ethernet adapters, lack the excitement of Nvidia’s GPUs, Broadcom has built a top-tier hardware and software portfolio.

Here’s more on why Broadcom is up more than 37% this year, and where the stock could be headed moving forward. 

Key Points About This Article:

• Broadcom remains a top chip stock investors are looking at for AI exposure in this current market, with its valuation increasing amid growing demand in its key AI revenue category.
• The question is whether the majority of Broadcom’s future growth is priced in, or whether the stock can continue to appreciate from here. 
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Big-Time AI Potential 

OpenAI, led by CEO Sam Altman, held talks with semiconductor designers like Broadcom to reduce its reliance on Nvidia and strengthen its supply chain. These discussions are aimed at securing essential components for advanced AI models. To maintain its AI leadership, OpenAI is proactively seeking such partnerships, and it should be no surprise to many investors to see Broadcom’s name included in the group, given the competitive nature of this space. 

OpenAI’s early talks with chip designers, including Broadcom, to reduce reliance on Nvidia and enhance AI infrastructure represent just one catalyst for the company. But it’s an important one to consider, as both Microsoft and OpenAI look for greater autonomy over their AI ambitions. And while Broadcom hasn’t commented on the discussions, investors in the market do appear to like what they’re hearing.

J.P. Morgan predicts Broadcom will thrive in the AI sector, capturing significant market share as demand for AI semiconductors rises. Analyst Harlan Sur maintained an Overweight rating with a $200 price target, highlighting Broadcom’s AI leadership and positive CEO insights for the company’s growth trajectory. Indeed, Broadcom remains a top player in high-end AI chips and could see $150 billion in AI revenue over five years, reflecting a 30-40% annual growth rate.

Broadcom, noted for its unmatched scale and technology, led the industry across various markets. The stock has seen a 37% surge so far this year, surpassing the performance of the Nasdaq Composite the iShares Semiconductor ETF. 

Excellent and Improving Fundamentals 

Over the past ten years, Broadcom has been busy acquiring small chipmakers and infrastructure firms. In fact, 58% of its revenue come from its semiconductor businesses, and the rest comes from the infrastructure software. Among its biggest customers is Apple, but its acquisition of VMware reduced its dependency on the iPhone giant.

In fiscal 2022, the company’s revenue grew to $33.2 billion, with the company’s earnings per share surging 34%. Fiscal 2023 saw an additional 8% in revenue, reaching $35.8 billion. Although the company has seen a slowdown due to the 5G cycle and economic challenges, analysts project a 44% revenue and 13% EPS growth rate moving forward. This is mostly thanks to its high AI chip sales and the company’s aforementioned VMware acquisiton.

For fiscal 2025, Broadcom expects to see a 17% revenue increase and 27% rise in its earnings per share. Currently, the stock trades 24-times forward earnings with a 1.5% dividend yield. Its latest quarterly report highlighted $9.8 billion in cash holdings, but debt from past acquisitions totaled $71.6 billion.

Broadcom ranks 13th globally in terms of market capitalization, ahead of giants like Intel and AMD. The company is exploring AI chip development with OpenAI, which could significantly boost its revenue. Despite lower semiconductor margins, Broadcom’s strong profitability and efficiency suggest substantial growth potential.

There’s a Reason Why Analysts Suggest AVGO Stock Is a Buy

As the leading company in global technology specializing in both chips and infrastructure, Broadcom is one stock investors shouldn’t ignore. The company has placed a greater focus on niche markets by leveraging its extensive patent portfolio to develop high-performance, integrated semiconductors and software products.

Broadcom’s products are diverse, and it included data centers, telecommunications, home connectivity, and industrial automation. It leads the data center networking chip market with 80% share and dominates AI ASICs with 60%. With a valuation of 36.2-times non-GAAP earnings, Broadcom is seen as a solid long-term investment in semiconductor growth. 

Despite its “boring” reputation, its stability and growth potential make it a compelling choice for investors seeking value in the chip sector. Investors know Broadcom for its innovation and high-performance designs, Broadcom targets markets with strong growth potential and attractive margins.