Broadcom (AVGO 0.52%) has emerged as a key player in the artificial intelligence races, perhaps second only to Nvidia in terms of the benefit and uplift from the AI infrastructure buildout.
But like Nvidia, the stock also sold off mightily after its recent third quarter earnings report. While revenue and earnings per share beat expectations, Broadcom's guidance was on the lighter side compared with high analyst expectations.
With the stock now down 17.5% off its all-time high, is this a buy-the-dip opportunity? One analyst thinks so. The most bullish price target on Broadcom is $240, amounting to 71% upside from here.
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Key Data Points
Recent results were solid, but analysts were hoping for more on guidance
In its fiscal third quarter, Broadcom grew revenue 47%, but that growth rate was heavily affected by the addition of VMware to Broadcom's results. Of note, Broadcom acquired the software giant for $69 billion last November. So its results weren't part of last year's comparisons.
Excluding VMware, and Broadcom's revenue only grew about 4% overall. While not a great number on the surface, that revenue did exceed analysts' expectations.
Broadcom also guided for about $14 billion in the current fourth quarter, which would mark a 7.1% sequential increase. That's actually impressive, amounting to roughly a 30% annualized growth rate going forward. While the year-over-year comparisons are muddy due to the inclusion of VMware, the 7.1% quarter-over-quarter-growth from Q3 to Q4 would be an acceleration over last year, when revenue increased only 4.7% between Q3 and Q4 2023.
Still, analysts were hoping for even more, because of Broadcom's exposure to AI. Broadcom's AI business has exploded this year. On the conference call with analysts, management noted its custom ASIC business, which makes parts of the in-house AI accelerators for major cloud companies, grew 3.5 times over the year-ago quarter. Broadcom's ethernet switching chips grew four times over last year's total. And optical lasers and interconnect grew three times over the prior-year quarter.
But in the fourth quarter, management sees its total AI business growing 10% quarter over quarter to $3.5 billion, which annualizes to "just" 46% annual growth. While normally that would be an incredible number, it would mark a deceleration from the hundreds-of-percent growth seen over the past year.
But there's a bull case to be had in the coming year
While guidance may have disappointed, it's possible it was somewhat conservative or skewed by continued weakness in non-AI and non-VMware spending. But AI and VMware are becoming larger parts of the business, which should underpin growth over the next few years.
AI semiconductor growth is projected to be $3.5 billion this quarter, out of $8 billion in total semiconductor revenue. So it's now approaching half of Broadcom's chip revenue. Meanwhile, VMware took in $3.8 billion in revenue last quarter, making up 66% of Broadcom's $5.8 billion in software revenue. Next quarter, Broadcom expects $6 billion in software revenue – with most or all of that growth likely coming from VMware.
But VMware appears to be growing very fast. While we don't have year-over-year comparisons, Broadcom grew VMware revenue from $2.1 billion to $2.7 billion to $3.8 billion between Q1, Q2, and Q3.
Assuming VMware will do about $4 billion in revenue in the fourth quarter, Broadcom should see VMware and AI chip revenue making up about $7.5 billion out of its $14 billion in revenue guided for Q4 -- or over 50%. While VMware will likely slow from its current torrid pace, these segments could still combine to grow 20%-plus in the coming year.
The other parts of Broadcom are lower growth, composed of non-AI networking, storage, telecom infrastructure chips, and radio frequency filters for the iPhone. While these are maybe low-single digit growth businesses over time, many of those are in a steep downturn now. Non-AI networking was down 41% year-over-year last quarter, and server storage was down 25%. Wireless revenue, largely from the iPhone, was up just 1%.
However, management sees these non-AI chip markets bottoming and turning around. So even that other substantial part of Broadcom's revenue could grow double-digit in the year ahead as these other markets recover. That sets Broadcom up for potentially 20%-plus overall growth in the year ahead.
With the stock now trading at $140, or just below 30 times its estimated adjusted (non-GAAP) earnings for the current year ending in October, that's really not a demanding valuation, especially if interest rates come down as many expect.
Broadcom's sell-off is an opportunity. Image source: Getty Images.
The most bullish analyst on the street sees $240 in Broadcom's future
The most optimistic analyst on Wall Street is Hans Mosesmann from Rosenblatt Securities. He actually recently took his earnings estimates up after the latest earnings release. This could have been due to believing management was being conservative, attributing the "miss" to less-important non-AI segments, or perhaps believing the AI spending boom will be stronger for longer than the current consensus.
"We take our estimates up modestly and believe the company and the prospects of AI compute that is 'open' in terms of industry connectivity standards will thrive going forward in acceleration, [generative] AI, and networking cloud and edge segments," he wrote in a recent note.
An AI stock with a decent dividend is hard to find
Broadcom's portfolio, comprised of half high-growth AI beneficiaries and half legacy low-growth tech segments is an interesting combination. The non-AI parts have kept Broadcom's valuation below Nvidia's and others in the AI space, with a reasonable dividend that currently yields 1.55%.
But if one is a believer that the AI buildout will go on through the end of the decade, Broadcom's AI-exposed segments will eventually become a strong majority of the business. That should enable multi-year overall growth, making the stock a solid buy on the recent dip.
