What are the hottest stocks on the market right now? Those with a major focus on artificial intelligence (AI). Broadcom (AVGO +4.69%) stands out as a great example, with its shares skyrocketing more than 130% over the last 12 months.
The semiconductor and infrastructure software company could have a catalyst that'll send its share price even higher on the way soon. It's scheduled to announce its fiscal 2024 first-quarter results after the market closes on March 7, 2024. Is Broadcom an AI stock to buy hand over fist before its big news on Thursday?
NASDAQ: AVGO
Key Data Points
Behind Broadcom's huge gains
With Broadcom's share price soaring so much, you might think that the company's revenue would be growing rapidly too. However, that's not the case. In the fourth quarter of fiscal 2023, Broadcom's revenue rose by only 4% year over year.
But the company probably crushed Wall Street earnings estimates, right? Not really. Sure, Broadcom topped analysts' earnings estimates in recent quarters. In Q4, though, it beat the consensus estimate by only 0.7%. Broadcom's biggest earnings surprise over the last four quarters was delivering earnings that were 2.4% higher than anticipated in fiscal 2023 Q2.
Instead of impressive top and bottom line numbers, there are two other key factors behind Broadcom's huge gains over the last 12 months. First is the tailwind provided by generative AI. Second is Broadcom's acquisition of VMware.
Broadcom CEO Hock Tan said in the December conference call that generative AI revenue made up roughly 20% of semiconductor revenue in Q4. In fiscal 2024, however, the company expects generative AI to contribute more than 25% of semiconductor revenue.
One of Broadcom's peers, Advanced Micro Devices, projects the potential market for AI accelerators could be as big as $400 billion per year. When asked about AMD's estimate, Tan didn't comment on the market size but agreed with AMD that the demand related to AI "appears to be accelerating."
As for the VMware acquisition, Broadcom announced plans to acquire the enterprise software leader back in May 2022. It closed the transaction on Nov. 22, 2023. With VMware now part of its business, Broadcom expects fiscal 2024 revenue to jump 40% year over year to around $50 billion.
What Wall Street expects on Thursday
Let's turn our attention to what Broadcom might announce in its Q1 update on Thursday. The company only provided full-year guidance in December and hasn't given any hints about what to look for in the first quarter.
However, we can look at Wall Street's expectations. The consensus Q1 revenue estimate for Broadcom is around $11.7 billion, up 31% year over year. One of the analysts surveyed by LSEG thinks that the company will report revenue as high as $12.6 billion.
The average analysts' estimate for Q1 adjusted earnings per share (EPS) is $10.29. This number is a little lower than Broadcom's adjusted EPS from the prior-year period. However, there's a wide range in Wall Street's adjusted earnings estimates with only $9.02 on the low end and $11.50 on the high end.
Should you hurry to buy Broadcom stock?
Broadcom may deliver Q1 results that blow past Wall Street's estimates. If so, the stock will almost certainly enjoy a big boost. So should you hurry to buy Broadcom stock before Thursday? I don't think so.
For one thing, we've already established that Broadcom's quarterly earnings results historically come in fairly close to analysts' estimates. A huge upside surprise is possible but arguably not probable. That said, I wouldn't be shocked if Broadcom beats estimates handily thanks to generative AI momentum and an impact from VMware that was better than expected.
The main reason why I don't think investors should scramble to buy Broadcom stock, though, is its valuation. Shares currently trade at a forward earnings multiple of over 30x. Even with future growth factored in, Broadcom's valuation isn't compelling enough in my view to buy it hand over fist right now.
I like the company. I like its business. At this point, however, I think other AI stocks offer even more attractive risk-reward propositions.
