Given Broadcom’s (NASDAQ:AVGO) high exposure to the artificial intelligence megatrend, its impressive list of partners and customers and the reasonable valuation of Broadcom stock, I view the shares as a buy for investors looking for increased exposure to large AI chip makers.
Also working in Broadcom’s favor are the strongly positive sentiment towards the name on the Street and the very impressive quarterly results that the chip maker reported in June.
High AI Exposure, Impressive Partners and Customers
Last quarter, Broadcom’s “AI-related revenue” soared 280% versus the same period a year earlier and 35% compared with the previous quarter to $3.1 billion. The latter figure represented nearly 25% of the company’s total revenue of $12.5 billion. Moreover, as its AI revenue continues to grow extremely rapidly in the coming quarters, Broadcom’s exposure to the AI Revolution and the efficacy of Broadcom stock as a play on the AI megatrend will grow rapidly.
One of the factors that makes me confident in the firm’s ability to continue quickly increasing its AI revenue is its impressive roster of partners and customers. Among the names on this list are Arista Networks (NYSE:ANET), Dell (NYSE:DELL), Super Micro Computer (NASDAQ:SMCI), Alphabet (NASDAQ:GOOG, GOOGL), ChatGPT owner OpenAI and ByteDance, the owner of TikTok.
Additionally, investment bank TD Cowen recently reported that Broadcom was obtaining a higher amount of company outlays on GenAI and the bank predicted the trend would accelerate in the second half of this year.
Very Positive Sentiment and a Reasonable Valuation
After holding conversations with investors recently, Citi, quite remarkably, believes that Broadcom could be catching up with Nvidia (NASDAQ:NVDA) when it comes to investors’ outlook. As reasons for the increasingly upbeat view of Broadcom stock, Citi cited the chipmaker’s recent recruitment of ChatGPT and ByteDance, along with the profitability of VMWare, which Broadcom acquired in 2023.
Also indicating the Street’s sentiment towards Broadcom stock is improving was the decision by investment bank Rosenblatt to hike its price target on the name to $2,400 from $1,650. It also kept its “buy” rating on the stock.
Among the factors cited by the bank for its decision were the company’s “Strength in AI-related infrastructure networking” and its “improved synergies in enterprise software”. Rosenblatt believes the company’s revenue should grow by nearly 20% next year.
Moreover, analysts’ average price target on AVGO stock is $192, well above the shares’ current price.
And on the valuation front, the shares have a reasonable forward price-to-earnings ratio of 26.8 times. Noteworthy is the fact that the shares have dropped roughly 12% since June 17, creating a good entry point.
Very Strong Quarterly Results
Last month, Broadcom reported its top line soared 43% versus the same period a year earlier to $12.5 billion. Net income, excluding certain items, also jumped to $5.39 billion from $4.5 billion in Q2 of 2023. Impressively, free cash flow came in at $4.5 billion, representing a very high 36% of its revenue. Since the Street tends to embrace companies with high profit margins, the latter figure is quite significant.
“Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds,” Broadcom CEO Hock Tan said in a statement.
The Bottom Line on AVGO Stock
Given Broadcom’s strong exposure to the AI megatrend, Broadcom looks poised to continue rapidly expanding its top and bottom lines. What’s more, the Street’s positive sentiment towards the name should boost the stock in the near-to-medium terms. The stock’s valuation is also reasonable. In light of these points, I urge investors looking for increased exposure to Big Tech and AI to buy the shares.
On the date of publication, Larry Ramer held long positions in ANET and SMCI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
