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Shares of Broadcom (AVGO) surged +29% in May, its largest monthly gain ever, as the frenzy over artificial intelligence (AI) sent the stock soaring. The markets will focus on Broadcom’s quarterly earnings results after the close of trading today to see if AI has actually boosted the company’s sales.
Broadcom is up +45% this year, outperforming the Philadelphia Stock Exchange Semiconductor Index ($SOX) but well below the gains seen in stocks with direct exposure to AI, such as Nvidia (NVDA) and Advanced Micro Devices (AMD). Deepwater Asset Management thinks Broadcom will end up among the AI winners but warned that today’s earnings results “aren’t going to show a shot in the heart of growth, and any investors expecting the same wicked adrenaline as Nvidia will be disappointed.”
The chips made by Broadcom do a lot of the support work for AI services. The switch chips that Broadcom makes control the flow of information between computers and a crucial part of the infrastructure needed to expand the technology. UBS and KeyBanc Capital Markets boosted their price targets for Broadcom Tuesday on the potential for generative artificial intelligence boosting growth. Also, the renewal of a multibillion-dollar deal to supply 5G radio frequency components to Apple is seen as boosting Broadcom’s future sales.
Broadcom’s valuation may make it less exposed to any fall in AI euphoria than its peers. The stock is trading at 19 times forward earnings, compared with 24 times for the Philadelphia Stock Exchange Semiconductor Index and well below Nvidia’s multiple of nearly 50 times. KeyBanc Capital Markets said sentiment on the stock is “slightly positive” given generative AI demand trends and the renewal of the supply deal with Apple, though there are concerns related to a slowdown in spending by cloud and enterprise customers.
Broadcom CEO Tan said back in March that he expects to see “exponential demand” for hyper-scale customers for network chips deployed in AI, boosting that business from $200 million last year to “well over” $800 million in 2023. That is still only a small part of Broadcom’s annual revenue of $35 billion. Analysts are expecting Broadcom today to report Q2 revenue growth slowed to +7.6% y/y, ending a 10-quarter streak of double-digit expansion. Allspring Global Investments said, “Because Broadcom’s valuation is more reasonable, if there is a mild disappointment, we don’t think the stock will fall into a sinkhole the way other AI stocks would.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
