If you thought 2023 was the year of artificial intelligence (AI) stocks, 2024 has been a pleasant surprise.
AI stocks have gone from hot to scorching this year, led by sector winners like Nvidia (NVDA 6.18%), the AI chip superstar, and Super Micro Computer, a maker of AI servers and storage equipment. Nearly every AI stock has jumped on its earnings report so far this year, including Arm Holdings, Taiwan Semiconductor, ACM Research, and just last week, Dell Technologies. The evidence in the sector continues to indicate that demand for AI hardware and components is ramping exponentially and exceeding Wall Street's expectations.
On Thursday, Broadcom (AVGO 3.84%) will be the latest AI stock to test this pattern, as it will report earnings after the market closes. Broadcom, a diversified semiconductor maker, has gained 21% so far this year, a sign it's also benefited from the rising AI tide.
Will Broadcom stock continue the AI hit parade and jump on its earnings report on Friday? Let's take a closer look.
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Broadcom and AI
Broadcom has a market cap of more than $600 billion, and a number of Wall Street analysts have pinpointed it as the second-biggest AI chip stock winner after Nvidia. However, Broadcom plays a different role in artificial intelligence than Nvidia, which has a dominant market share of the GPUs (graphics processing units) and accelerators used in data centers to run massive AI models that make programs like ChatGPT run.
Broadcom isn't known for GPUs or chips used for training and inference, which are the major computing demands of AI applications. Instead, Broadcom's strength is in the networking chips that allow AI components to work together. For example, last April, the company launched its new Jericho3-AI fabric designed for high-performance connectivity for a 32,000 GPU cluster, and CEO Hock Tan cited demand for "network connectivity for AI by hyperscalers" as a key driver in the company's growth last fiscal year.
Management also noted on the earnings call that generative AI revenue represented $1.5 billion in revenue in the latest quarter, which was 20% of its semiconductor revenue or 16% of total revenue. That's significant, and management expects robust networking growth in fiscal 2024, which began in November at 30%, driven in part by an expansion of AI accelerators at cloud infrastructure services. It also forecasts generative AI revenue improving from 15% of semiconductor revenue in 2023 to 25% in 2024.
Investors should be aware that Broadcom is not experiencing the kind of blowout growth that Nvidia and Super Micro Computer have seen, as it's sensitive to the industry cycle and is seeing headwinds in some of the end markets it serves, like telecoms. In the fourth quarter, Broadcom's revenue rose just 4% to $9.3 billion.
However, investors have shown that immediate revenue growth isn't necessary for a stock to benefit from the AI boom. Dell Technologies shares, for example, jumped 32% on its earnings report last Friday, even though the company actually reported an 11% decline in Q4 revenue. Despite that, growing demand for its AI servers was enough to send the stock soaring. Similarly, Arm shares also surged on its earnings report in February even though revenue only rose 14%. In its case, increased guidance from AI-related business signaled the company is capitalizing on the AI boom and drove shares dramatically higher.
Is Broadcom stock a buy?
Going into the fiscal first-quarter earnings report, analysts have modest expectations for Broadcom's results, which its recently closed acquisition of VMware will impact. The average estimate calls for revenue of $11.72 billion, up 31% from a year ago, but sees earnings per share falling slightly from $10.33 to $10.29, which is partly a reflection of integrating VMware.
If you're considering buying shares of Broadcom ahead of the earnings report, you're best off taking a long-term approach to the stock. Earnings movements are difficult to predict accurately, and even the best stocks will miss earnings on occasion.
For long-term investors, Broadcom looks like a good choice for several reasons. It has a long track record of beating the market. CEO Hock Tan is well-regarded for operating with ruthless efficiency and is expected to squeeze more profits out of VMware, and the company looks well-positioned to benefit from the growth of AI market, even though it's too diversified to see the kind of soaring growth that Nvidia has experienced. It also trades at a reasonable valuation.
As for the stock's response to the earnings report on Friday, the recent evidence from AI stock peers bodes well for Broadcom, and it wouldn't be surprising to see the company lift its guidance for AI-based growth based on what we've seen from its peers. Options traders are also betting on Broadcom to pop on Friday, indicating the odds may be in its favor. However, I think a huge surge in the stock like Dell and Arm recorded seems less likely given Broadcom's large size, diversification in businesses that are not directly exposed to AI, and investor attention on the VMware acquisition.
No matter the extent of a potential surge, I'm more confident in the company's long-term potential in AI and beyond, given its history of execution and strength in networking solutions.
