Broadcom's Future Prospects: Analyzing the Semiconductor Giant's Potential

Should You Buy Broadcom Stock Before Sept. 5? | The Motley Fool

Will this semiconductor stock's rally get a shot in the arm from its upcoming earnings report? Broadcom (AVGO 3.75%) stock has stitched together impressive gains of 43% so far in 2024, easily outpacing the 22% gains clocked by the PHLX Semiconductor Sector index this year, and that's not surprising as the semiconductor giant has been delivering solid quarterly results of late, thanks to the growing demand for its custom chips. Artificial intelligence (AI) is playing a central role in giving Broadcom's business a boost. More specifically, Broadcom said in June that it was on track to generate more than $11 billion in revenue this year from sales of AI chips. However, a closer look at the company's recent quarterly results shows that its AI revenue could end up at stronger levels, which is why investors who haven't bought this semiconductor stock should consider buying shares before it releases its earnings report on Thursday. Broadcom will release its fiscal 2024 third-quarter results on Sept. 5 after the markets close. Analysts are expecting $1.20 per share in earnings on revenue of $12.96 billion. The revenue estimate suggests that the company's top line is on track to increase 46% year over year, driven to a large extent by the acquisition of VMware which it completed in November 2023. However, investors should note that Broadcom has beaten Wall Street's earnings expectations in each of the last four quarters. What's more, the company raised its fiscal 2024 revenue forecast to $51 billion the last time it reported earnings, from the previous forecast of $50 billion, driven by stronger-than-expected demand for its AI chips. Broadcom makes custom AI processors, known as application-specific integrated circuits, which are reportedly being deployed by major tech names to train and deploy AI models. At the same time, the company's networking business has also received an AI-driven boost, with the demand for its ethernet switches rising rapidly to cater to the growing demand for fast connectivity in data centers to support AI workloads. More specifically, Broadcom's AI revenue was up an impressive 280% year over year in the previous quarter. There is a good chance of the company being able to sustain that terrific growth, both in the short and the long run. Harlan Sur of JPMorgan forecasts that Broadcom's cumulative AI revenue opportunity over the next four to five years stands at a massive $150 billion, which could help the company's semiconductor revenue increase at an annual rate of 30% to 40%. Broadcom gets 58% of its revenue from selling semiconductor chips. This business generated $7.2 billion in revenue in fiscal Q2, translating into an annual revenue run rate of almost $29 billion. With $3.1 billion in revenue coming from sales of AI chips in the second quarter, 43% of Broadcom's semiconductor sales were attributable to this fast-growing technology. A $150 billion revenue opportunity indicates that Broadcom's semiconductor revenue is likely to grow big time in the long run. As such, it won't be surprising to see the company raising its full-year guidance once again when it releases its results on Sept. 5, especially because it has expanded its customer base for custom AI processors and is ramping up production for a third customer this year. A better-than-expected set of results along with another guidance boost would likely give Broadcom stock a shot in the arm, which is why it may be a good idea to buy it before its upcoming results considering its valuation. It doesn't make sense to try to time the market and buy to take advantage of just a short-term price jump, but I think the stock is worth holding for years. Broadcom's trailing valuation multiples are expensive. The stock is trading at 17 times sales and 72 times earnings. However, the forward earnings multiple of 27, based on earnings expectations, points toward a big jump in its bottom line. The company is expected to deliver $4.75 per share in earnings this year, which would be a small increase from last year's level of $4.22 per share. But, as the following chart shows, its bottom-line growth is expected to get better. The expected acceleration in Broadcom's earnings growth explains why the stock is sporting a price/earnings-to-growth ratio (PEG ratio) of 0.76. The PEG ratio is a forward-looking valuation metric that's calculated by dividing a company's earnings multiple by the projected earnings growth it could deliver. A reading of less than 1 is considered to mean that a stock is undervalued in light of the growth it could clock, and the chart above shows that Broadcom is an attractive stock to buy based on its potential growth. As such, investors looking to add a growth stock to their portfolios would do well to buy Broadcom before its upcoming results -- as a strong set of numbers are likely to send its shares higher -- and then hold for the long term.

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

With Broadcom's (AVGO 3.75%) upcoming earnings in focus for many tech investors, I wanted to take a longer view and examine where the stock might be in three years -- not where it will trade in the next three weeks. As such, let's take a closer look at the technology company, what it does exactly, and where its stock could be headed. Broadcom has a long history of acquisitions. In fact, if you have ever wondered why a company called Broadcom has the ticker symbol "AVGO," it stems from Avago's acquisition of Broadcom back in 2016. Avago decided to keep its ticker symbol, but it took the Broadcom name. At the time, the deal brought together the leader in analog semiconductor devices (Avago) and the leader in semiconductor solutions for wired and wireless communications (Broadcom). But even before that big deal, Avago, which was originally a part of Hewlett-Packard, had made a number of sizable acquisitions, including LSI as well as Infineon's Polymer Optical Fiber business. It later bought storage networking company Brocade in 2017. Following its deal for Brocade, Broadcom shifted gears and began acquiring companies in the software space, including CA Technologies and cybersecurity company Symantec. More recently, the company made another huge deal, buying VMware for about $86.3 billion in cash and stock. These various deals have gotten Broadcom into a variety of different businesses. On the semiconductor solutions side, this includes such offerings as ethernet and switches, fiber optics, broadband access, set-top boxes, RF semiconductor devices, and storage. Meanwhile, on the software solutions side of its business, it has solutions for such things as database management, cybersecurity, SAN management, cloud computing, virtualization, and even payment authentication. All in all, Broadcom has 26 divisions encompassing both semiconductor and software infrastructure. Networking is Broadcom's largest business, and on that front, the company has been benefiting from the current artificial intelligence (AI) buildout. While Nvidia has been the biggest beneficiary of this buildout, its graphic processing units (GPUs) are not the only component that goes into a GPU cluster. Broadcom also has critical components, including switches and NICs (network interface cards). Switches allow two or more devices to communicate with each other, while NICs are needed to connect to a network. As clusters become larger, Broadcom believes that the networking piece of the cluster will become increasingly important. The reason is that it will cause a distributed compute challenge that needs to be solved. In addition to networking, Broadcom also builds custom chips (application-specific integrated circuits, or ASICs) for customers. For example, it is behind Alphabet's tensor processing unit for AI workloads. Broadcom sees this as a big opportunity as companies will want customized silicon to run specific AI workloads more efficiently than can be run with general GPUs. Analysts at Morgan Stanley are very bullish on this opportunity, estimating that Broadcom's ASIC revenue will be from $3 billion in fiscal year 2023 to $10 billion in fiscal year 2025. This bullishness stems from the company adding two new customers in addition to Alphabet. Overall, the company has seen strong AI revenue growth, with Q2 (ended May 5) AI revenue surging 280% year over year to $3.1 billion. While Broadcom's AI business has been doing great, its other businesses have struggled. The biggest reason behind this stems from cyclical weakness in the enterprises and telco spaces. Broadcom believes that both service storage revenue and broadband revenue are close to bottoming. That said, this is why its overall revenue, excluding VMware, only rose 12% in fiscal Q2, despite the huge surge in AI revenue. Meanwhile, with VMware, the company is currently in the process of transitioning all of its software products to a subscription service. It said that about 3,000 of its largest 10,000 customers have already signed up to build a self-service virtual private cloud on-premise. Broadcom has a solid history of integrating acquisitions, and the transition of VMware to a subscription service looks like a good long-term move. It also recently just pushed out some tools for its software-defined edge products to help edge computing customers deploy AI tools. AI will be Broadcom's biggest opportunity over the next few years. This includes its networking solutions as clusters grow in size and complexity, as well as with customized chips. It then needs to see a rebound in its more commoditized businesses. Meanwhile, management has forecast that VMware will grow its revenue by double digits over the next three years. Those growth opportunities are why analysts are currently projecting the company's earnings per share to rise from a projected $4.75 this fiscal year (ending in October) to $8.59 for fiscal 2027, a little over three years out. Broadcom has traded in a pretty wide price-to-earnings (P/E) range over the past five years, from around 25 to 75 times. At the middle of that range, though, you are looking at around a $430 stock if it can grow its earnings as expected.