Broadcom’s (NASDAQ:AVGO) stock may hit new highs as the semiconductor sector will integrate a sharp recovery in the fourth quarter of 2024. As per analysts at Bank of America Securities, the industry has struggled in the third quarter of 2024. The sector countered heightened volatility and macroeconomic (demand side) concerns.
The iShares Semiconductor ETF (NASDAQ:SOXX) yielded negative returns during this period, reflecting the broader market’s uncertainty over the short term. However, the ETF as a sector benchmark remains green for 2024, which points to the sector’s underlying long-term strength.
The fourth quarter has been a strong period for semiconductor stocks. Since 2010, average returns have ranged between 7% and 10.5% . This seasonal pattern suggests Broadcom could benefit from a market recovery starting in October 2024. This may also be the case with other major peers like Nvidia (NASDAQ:NVDA) and KLA (NASDAQ:KLAC). The bank’s analysts highlight that November and December are traditionally among the strongest months for the S&P 500. This stance further supports the potential for a semiconductor stock rebound. In short, these developments make AVGO stock a strong buy.
Broadcom’s Massive Revenue Growth
Broadcom’s consolidated net revenue for Q2 2024 reached $12.5 billion, a 43% year-on-year (YoY) increase. The revenue includes a full quarter of VMware’s contribution. Excluding VMware, Broadcom’s consolidated revenue still grew by 12% YoY. This 12% organic growth emerged primarily from AI revenue, which increased by 280% YoY to $3.1 billion. This surge in AI revenue offset the cyclical weakness in semiconductor revenue from enterprises and telcos.
Moreover, Broadcom’s capability to derive high revenue growth reflects its strong market position. The organization’s revenue structure suggests a deliberate concentration on sectors with solid development potential. Indeed, a sizable chunk of Broadcom’s top line is now made up of revenue from AI. Given the continued rise in demand for AI-related technology, this transition towards AI is imperative.
Further, VMware’s integration has also contributed to Broadcom’s revenue growth. VMware’s revenue contribution increased from $2.1 billion in Q1 to $2.7 billion in Q2. The progressive integration of VMware’s operations has allowed Broadcom to modernize its product offerings. Broadcom reduced VMware’s product variants from over 8,000 to four core products. This simplification has streamlined the go-to-market flow and eliminated channel conflicts.
AI Revenue Potential and Networking Segment Growth
Broadcom expects its AI revenue to exceed $11 billion in fiscal 2024, a significant increase from previous years. The growth is led by solid demand from hyperscalers for AI networking and custom accelerators. Broadcom’s lead in AI-related technologies positions its stock for market value growth. The company’s edge in networking AI accelerators and its strategic partnership with major industry players give it a competitive push. Broadcom’s AI revenue growth potential is a core element of its top-line growth.
Additionally, Broadcom’s networking segment reported revenue of $3.8 billion in Q2 2024, a 44% YoY increase. The networking segment now accounts for 53% of Broadcom’s semiconductor revenue. Strong demand from hyperscalers, large-scale cloud service providers that require extensive networking infrastructure, is driving the growth in networking revenue.
Moreover, the demand for AI networking and custom accelerators has been robust. Broadcom has doubled the number of switches sold year over year. These have been deployed with partners like Arista Networks, Dell, Juniper, and Supermicro. Broadcom has also doubled its shipments of switches and ICs for AI backend fabric.
Anticipated Surge in Broadcom Stock
Broadcom will capitalize on this anticipated rebound with its sharp execution in core sub-sectors of the semiconductor industry. The company’s exposure to high-growth areas (data centers and networking) aligns it with the sectors expected to lead the recovery. As seasonal headwinds normalize, Broadcom’s solid fundamentals could drive its stock to new highs. It may outperform the broader market in the process.
Finally, with the normalization of seasonal headwinds and a favorable fourth quarter on the horizon, Broadcom is set to experience significant growth. Overall, as the semiconductor sector rebounds, its strong market position and consistent execution will likely propel its stock to new highs, reaffirming the status of AVGO stock as a top pick in the industry.
On the date of publication, Yiannis Zourmpanos did not hold (either directly or indirectly) any positions in the securities mentioned in this article. 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.
