Broadcom shares slumped in Friday trading after the networking-chip maker posted a mixed set of quarterly earnings and a muted near-term revenue forecast, which added to concerns that the AI-investment theme could be slowing into the final months of the year.
Broadcom (AVGO) , one of the market's star performers in 2024, has seen a huge surge in demand for its specialized networking chips, helping the group add more than $200 billion in value this year.
The chips play a key role in the development of AI systems, where large data models require a series of networks, connected by nodes, that determine the speed at which information collected in one network is passed along to the next.
The group also makes what are known as ASIC chips, which help hyperscalers — the large providers of cloud services and infrastructure — move large amounts of data through integrated circuits and ultimately accelerate the speed and reliability with which they process information.
Broadcom's role in the AI investment theme, as well as the muted earnings and outlook reported last month by market-leading chipmaker Nvidia, put its fiscal third quarter earnings in sharp focus as investors looked to justify the broader sector's lofty valuations.
Broadcom was able to post a modestly better-than-expected revenue tally for the three months ended in July of $13.1 billion, thanks in part to a surge in demand for its ASIC and AI-focused chips. But it failed to impress investors with its near-term outlook.
AI revenue was essentially flat from the previous quarter at $3.2 billion but is likely to grow 10% in the current quarter thanks in part to continued demand from hyperscalers such as Meta Platforms (META) , Google parent Alphabet (GOOGL) and China-based TikTok owner ByteDance.
Improving AI growth forecasts
Broadcom sees current-quarter sales in the region of $14 billion, just shy of forecasts, with a full-year tally of around $51.5 billion, just ahead of its prior forecast of $51 billion.
Revenue from VMware, the cloud software group Broadcom agreed to buy for $61 billion in 2022 and closed on last year, is expected to reach a quarterly run rate of $4 billion.
"While the company’s report was solid, without any material soft points, its AI business lacked the clear upside momentum [Wall Street] was looking for," said Benchmark analyst Cody Acree, who reiterated his 'buy' rating and $210 price target following last night's earnings report.
"Still, the company’s results showed steady progress in its AI business (and) overall, we thought Broadcom delivered a solid report and outlook, with many points of fundamental strength for investors to be encouraged by," he added.
Morgan Stanley analyst Joseph Moore said Broadcom's AI growth, while not linear, remains strong, adding that the group's current forecast suggests flat growth for its AI products division.
Still, the analyst added $4 to his Broadcom price target, taking it to $180 per share, and affirmed an 'overweight' rating after the earnings report.
"We assumed that there was conservatism in that, and had a $12 billion estimate, but we highlighted in our preview that the company had characterized the ASIC business as lumpy from quarter to quarter," said Moore,
"That lumpiness did play out, as the company saw AI processors flattish quarter over quarter — with networking for AI up slightly," he added. "But importantly, growth is still close to 3 times this year, and sequential growth resumes in October."
Solid hyperscaler demand at Broadcom
Cantor Fitzgerald analyst CJ Muse, who reiterated his $200 price target and 'overweight' rating on Broadcom, said the AI revenue story remains compelling and the stock remains "one of the highest quality AI plays in the market."
"AI revenues continue to grow strongly and with customer breadth improving in custom chips (from Google to now Meta Platforms and Bytedance accelerating) coupled with ethernet networking growth tied very tightly with forward [graphics processing unit] sales, fiscal year 2025 should be another strong year for AI," he added.
Goldman Sachs analyst Toshiya Hari was also bullish on the group's longer-term outlook, calling the third-quarter numbers and current-quarter forecast a "hiccup."
Hari, who lifted his price target on Broadcom by $5 to $190 a share, citied the group's "consistent" cash-flow generation and its "robust" competitive position in the high-speed networking space.
JP Morgan analyst Harlan Sur also boosted his Broadcom price target, taking it $10 higher to $210 while keeping an 'overweight' rating in place.
More AI Stocks:
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"AI permeates enterprises all across and digital natives, you need to upgrade servers," Broadcom CEO Hock Tan told analysts on a conference call late Thursday. "You need to upgrade storage. You need to upgrade networking, connectivity across the entire ecosystem."
"If anything else, we could be headed for upcycle, timing of precisely when we're not sure, but an upcycle that could even meet or even surpass what our previous up cycles would be, simply because the amount of bandwidth you need, the amount to manage, store, manage all these workloads that come out of AI would just the need to refresh and upgrade hardware," Tan added.
Broadcom shares were marked 10.25% lower in early Friday trading to change hands at $136.78 each, a move that would trim the stock's six-month gain to around 1.4%.
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