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Semiconductors have a key role in powering the infrastructure of artificial intelligence (AI) computing, so perhaps it's no surprise that makers and designers of specialized AI chips have been among the stock market's standout performers this year amid widespread AI adoption. In fact, the VanEck Semiconductor ETF (SMH) is up 72.7% on a YTD basis - outperforming not only the S&P 500 Index ($SPX), but even the robust 44% return of the Nasdaq Composite ($NASX).
However, analysts seem to be expecting limited upside for one of the top-performing chip stocks of the year - even as they continue to rate it a “Strong Buy.” Here's a closer look.
About Broadcom
Founded in 1961 and based out of Palo Alto, Calif., Broadcom (AVGO) is a global leader in infrastructure technology, providing a wide range of semiconductor and infrastructure software solutions for data centers, cloud computing, networking, and wireless communications. It currently commands a massive market cap of $473.4 billion.
A key aspect that has made Broadcom a tech titan has been its tendency to be proactive and make strategic moves to stay ahead of the changing tech landscape. For instance, a decade ago, Broadcom was focused on making optical computer mouse and touchscreen technology for smartphones/tablets. And as the demand for digital connectivity increased, the company shifted its focus toward semiconductors.
As the transition from handsets to the cloud loomed, Broadcom acquired CA Technologies in 2018 for $18.9 billion. CA was a leader in the software-as-a-service space for enterprise IT solutions, and this move marked AVGO's first big step out of the hardware and into the software space. The very next year, the company burnished its digital security credentials with the $10 billion purchase of digital security firm Symantec.
As of 2023, some 79% of Broadcom's revenue came from its semiconductor-based products, and 21% from its infrastructure software products and services.
Most recently, Broadcom closed the $69 billion acquisition of VMware in November, which further enhanced its cloud capabilities and established its presence in the data management domain.
Now, with substantial growth expected for the generative AI market, Broadcom is once again incredibly well-positioned, as the second-largest AI chip company by revenue behind only Nvidia (NVDA), powered by heavy demand from partners like Google (GOOGL).
Broadcom's Standout 2023 Performance
AVGO has rocketed nearly 107% in 2023, crushing the broader SMH. Along with its standout share price performance, Broadcom stock offers a dividend yield of 1.84%, backed by over a decade of consistent growth. The company most recently raised its dividend by 14.1% earlier this month.
In its third-quarter earnings report, Broadcom beat Wall Street's expectations on both the top line and bottom line. Revenues for the quarter came in at $9.3 billion, up 4% from the previous year. Adjusted EPS improved 6% to $11.06, surpassing the consensus estimate of $10.96. Notably, the company's EPS have topped expectations in each of the past five quarters.
The company reported a 5.9% yearly rise in free cash flow to $4.7 billion, with cash flow from operations of $4.8 billion. Overall, the company ended the quarter with a cash balance of $14.2 billion and a current debt balance of $1.6 billion.
Looking back over the longer term, Broadcom has grown revenue and EPS at an impressive 10-year CAGR of 30.40% and 31.15%, respectively.
What Do Analysts Expect for AVGO?
Analysts' forecasts for Broadcom's revenue and EPS growth are well above tech sector medians. Forward revenue growth is pegged at 18.23%, with forward EPS growth estimated at 21.77% - compared to mid-single digit sector median growth estimates for tech sector stocks.
And AVGO isn't too richly valued, despite its massive rally this year. The stock is priced at 24x forward adjusted EPS and 22.5x forward cash flow, which is in line with its industry peers. In fact, the forward PEG ratio of 1.67 is actually a modest discount to the tech sector median of 2.13.
Analysts have a “Strong Buy” rating on the stock, with a mean target price of $1,056.39. Although this represents a discount to current levels, some of the most recent analyst notes have been slightly more upbeat about AVGO's potential.
Last week, Citi resumed coverage of Broadcom at “Buy” with a price target of $1,100. The analysts expect sales from AI infrastructure to more than double in fiscal 2024 to exceed $8 billion, or 17% of sales. And a few days prior to the Citi note, analysts at BofA Securities reiterated a Street-high target price of $1,200 on AVGO - implying expected upside of about 4.4% from current levels.
Out of 23 analysts covering the stock, 19 have a “Strong Buy” rating and 4 have a “Hold” rating - a modest improvement from 15 “Strong Buys” and 5 “Holds” one month ago.
