Broadcom's Future Outlook: Analyzing Stock Performance and Growth Potential

Where Will Broadcom Stock Be in 3 Years? | The Motley Fool

Can this high-flying semiconductor stock start rising once again following its post-earnings setback? Broadcom (AVGO 6.79%) investors got a reality check last week following the release of the company's fiscal 2024 third-quarter results (for the three months ended Aug. 4). As a result, shares of the semiconductor giant tumbled more than 10% in a single session, even though its revenue and earnings exceeded expectations. The chipmaker fell victim to Wall Street's ambitious expectations as its guidance for the current quarter couldn't match consensus estimates. Those investors shouldn't be too upset though. Broadcom's business continues to get a nice boost from the growing demand for its custom processors and networking chips that are deployed in artificial intelligence (AI) data centers. That boost helped Broadcom's price rise nearly 81% over the past year, even after the post-earnings price drop. Let's take a closer look at Broadcom's latest results and check if investors should use its drop as an opportunity to buy an AI stock that could deliver healthy gains over the next three years. Broadcom's fiscal Q3 revenue increased 47% year over year to $13.1 billion, which was slightly ahead of the $12.98 billion consensus estimate. Its organic revenue growth (excluding the VMware acquisition that was completed in November last year) increased by 4% on a year-over-year basis. Broadcom's non-GAAP earnings increased to $1.24 per share last quarter from $1.05 per share in the year-ago period. The reading exceeded the consensus estimate of $1.22 per share. However, Broadcom's revenue forecast of $14 billion for the current quarter didn't quite meet Wall Street's expectation of $14.1 billion. While that wasn't a huge miss, investors were quick to press the panic button as they were anticipating the growing adoption of the company's AI chips to lead to a stronger outlook. Management comments on the latest earnings conference call provide clear evidence that AI is indeed giving the company's business a big boost. Sales of Broadcom's custom AI chips increased by 3.5 times on a year-over-year basis. Meanwhile, sales of the company's Ethernet switches increased by four times from the prior-year period, while the demand for its optical switching and interconnect offerings increased threefold. Based on this robust demand, Broadcom now anticipates AI revenue of $12 billion in fiscal 2024, up from the earlier expectation of $11 billion. The company also increased its full-year guidance to $51.5 billion from the prior expectation of $51 billion. Broadcom hasn't raised its overall revenue outlook by $1 billion despite raising its AI revenue guidance by that margin because of the weakness in non-AI related semiconductor sales. Broadcom's non-AI networking revenue fell 41% year over year last quarter. Similarly, the server storage connectivity business declined by 25% from the year-ago quarter. The weakness in these markets explains why Broadcom's semiconductor solutions revenue increased just 5% year over year last quarter. However, Broadcom management said it believes that Broadcom's non-AI semiconductor business has stabilized, and a recovery is expected to begin in the current quarter. Analysts increased their revenue estimates for the next couple of fiscal years following Broadcom's latest report. Broadcom has been touted by some as the second-most important AI chip company after Nvidia thanks to its solid position in the market for custom AI processors. J.P. Morgan estimates that Broadcom could pull in a cumulative $150 billion in revenue from its AI customers over the next four to five years. Those customers include Alphabet, Meta Platforms, OpenAI, and ByteDance, as well as a fifth unidentified customer. Broadcom's updated revenue forecast for fiscal 2024 suggests that AI will produce 23% of its top line. That proportion is likely to increase in the future considering the cumulative end-market opportunity the company is sitting on, as per J.P. Morgan. In all, a recovery in Broadcom's non-AI business along with the growth in its AI business is likely to drive an improvement in the company's growth in the future. There was a resulting bump in Broadcom's earnings growth estimates after it released its latest earnings report. Broadcom stock trades at 23 times forward earnings, which is a discount to the Nasdaq-100 index's forward earnings multiple of 29 (using the index as a proxy for tech stocks). So, investors can buy Broadcom at a relatively discounted valuation right now, and they may not want to miss this opportunity. If the market decides to reward Broadcom with a higher valuation thanks to its AI-driven growth, it could deliver healthy gains in the future. For instance, assuming Broadcom's earnings multiple increases to 29 after three years, in line with the Nasdaq-100, its stock price could hit $210 based on the $7.26 per share earnings estimate seen in the previous chart. That would be a 42% jump from current levels. So, investors looking to buy an AI stock that's capable of delivering healthy growth and is also trading at a reasonable valuation can consider buying Broadcom following its latest drop.

Is Broadcom a Buy on the Dip? 1 Wall Street Analyst Thinks It Can Nearly Double From Here. | The Motley Fool

Broadcom (AVGO 5.25%) 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. 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. 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. 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. 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.

This Popular Stock Has Been Quietly Ramping Up Its Artificial Intelligence Capabilities. Is Now the Time to Buy? | The Motley Fool

Semiconductor makers have been big winners in artificial intelligence, but not all chip businesses have enjoyed the same level of success. When it comes to semiconductor stocks and data center businesses, I'd wager that companies such as Nvidia and Advanced Micro Devices come to the top of your mind. The thing is, there's a whole lot more than just those two juggernauts when it comes to emerging opportunities in AI-powered chips and infrastructure solutions. Broadcom (AVGO 5.25%) is a company that is often featured in the AI narrative, but I wouldn't be surprised if you've overlooked the company's progress. Let's take a look at Broadcom's business and explore how the company is quietly building an influential operation in AI. After assessing the company's roadmap, investors may come to see why now could be a lucrative opportunity to buy Broadcom shares. Broadcom is not the easiest business to understand. The company has 26 divisions spanning various semiconductor and infrastructure solutions. Some of Broadcom's services include network connectivity chips used in data centers, server storage, broadband and wireless products, cybersecurity, and cloud computing. Although Broadcom's semiconductor use cases play similar roles to its chip counterparts, the company's growth has yet to show comparable levels of success. I think that is about to change, and a close look at Broadcom's investments should help shed some light on where the company is headed. Broadcom bifurcates its reported revenue into two categories: semiconductor solutions and infrastructure software. On Sept. 5 the company published earnings for the fiscal third quarter of 2024, ended Aug. 4. Broadcom generated $13.1 billion of revenue in the quarter, up 47% year over year. That looks pretty solid, right? Well, unfortunately there is more here than meets the eye. Back in November, Broadcom closed on its acquisition of cloud architecture software company VMware. If I exclude the financial contribution from VMware in the figures above, Broadcom's organic growth was actually only 4% year over year. On top of that, the company's largest source of revenue -- semiconductor solutions -- only grew 5% year over year during the latest quarter. Essentially, VMware's impact on the infrastructure software segment accounts for the lion's share of Broadcom's growth right now. That does not bode well. But don't worry, there's reason to believe Broadcom's business is about to be supercharged. For starters, the company's non-AI businesses look ready to turn things around. During the earnings call, Broadcom Chief Executive Officer Hock Tan said that "non-AI semiconductor revenue has stabilized" and that management is "expecting a recovery" starting next quarter as the non-AI segments have bottomed. Moreover, Tan also said that revenue from AI products will drive $12 billion in annual sales this year -- up from the prior company estimate of $11 billion. I see the turnaround in the non-AI businesses in conjunction with the ongoing integration of VMware as a compelling narrative supporting Broadcom's revamped look as a leading AI chip and cloud software enterprise. At the time of this writing, Broadcom trades at a forward price-to-earnings (P/E) multiple of 22.8. This is materially lower than Nvidia's forward P/E of 36.6 and a few notches below AMD's forward P/E of 25.2. What's more is that even though shares of Broadcom are up roughly 23% so far in 2024, they've actually been little changed during the past six months and have fallen during the past month. I don't think investors have soured on Broadcom, but the sentiment isn't overly positive either. To me, the discount in Broadcom's valuation multiples compared to other leading semiconductor stocks coupled with some recent price moves just suggests that the outlook for the company isn't as bullish compared to its cohorts. Ultimately, I think the disparity between Broadcom and other opportunities in the chip market is misguided. While the company is largely relying on VMware to drive growth right now, Broadcom has opportunities to parlay this asset into many other avenues touching chips and software at the intersection of AI. I see Broadcom in the very early stages of becoming a powerhouse in the AI landscape and think the stock is a good buy right now for investors with a long-term time horizon.