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PATRICK SEITZ

How AI Chip Growth Is Pushing Broadcom, Stock Of The Day, Toward A Buy Point

Broadcom is the IBD Stock Of The Day as the chipmaker and infrastructure software provider moves closer to completing its acquisition of VMware. AVGO stock also is approaching a buy point.

On Wednesday, the U.K. Competition and Markets Authority provisionally cleared Broadcom's takeover of VMware, removing one of the final regulatory hurdles to the deal. The companies announced the cash-and-stock deal in May 2022.

At the time, the transaction was valued at $69 billion. But at current prices, the acquisition is worth about $80 billion.

The European Commission, the European Union's executive arm and top antitrust enforcer, approved the acquisition on July 12. The deal still needs regulatory clearance in the U.S. and China.

Broadcom expects the transaction to close in its current fiscal year, which ends in October.

AVGO Stock Driver: Artificial Intelligence

In afternoon trading on the stock market today, AVGO stock rose 1% to 896.75.

AVGO stock has formed a flat base with a buy point of 921.78, according to IBD MarketSmith charts.

Lately Broadcom stock has gotten a lift from its exposure to the artificial intelligence trend. Broadcom makes custom processors and high-speed networking products for data centers.

CFRA Research analyst Angelo Zino calls Broadcom one of "the four horsemen of AI."

In a recent note to clients, BofA Securities analyst Vivek Arya said Broadcom has "robust opportunities ahead in AI." Arya also rates AVGO stock as buy with a price target of 1,050.

AI Chip Revenue Growing Fast

AI chips accounted for 10% of Broadcom's semiconductor sales in fiscal 2022 and should rise to the midteens percentage range, or about $4 billion in revenue, in fiscal 2023. Broadcom sees that jumping to 25% in fiscal 2024, reaching $6 billion to $8 billion in sales, Arya said.

Broadcom derives about 75% of its AI chip revenue from making custom processors for customers like Alphabet unit Google. The remaining 25% comes from AI Ethernet switches, Arya said.

Broadcom has been performing significantly better than the broader semiconductor industry thanks to its diversification, Arya said. Its sales likely will rise in the mid-single-digit percent range year over year in the second half of 2023 while the overall industry is seen declining 5% to 10%, he said.

AVGO Stock Is A Tech Leader

Meanwhile, Broadcom ranks sixth out of 36 stocks in IBD's fabless semiconductor industry group, according to IBD Stock Checkup. AVGO stock has an IBD Composite Rating of 97 out of 99.

IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.

Further, Broadcom is on the IBD Tech Leaders list, as is VMware.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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