Last night, semiconductor giant Broadcom soared, with its stock price surging by 9%,breaking the $1000 milestone and reaching a historic high!
On the news front, Citigroup released a research report yesterday, stating that Broadcom $Broadcom(AVGO)$ is poised to benefit from AI. It is reported that the related revenue is expected to increase from $4 billion in the fiscal year 2023 to $8 billion in the fiscal year 2024, with the revenue share rising from 11% to 17%. This is expected to mitigate the risks stemming from the downturn in demand for other semiconductor products.
Additionally, Citigroup forecasts that following Broadcom's acquisition of VMware, its earnings per share for the fiscal year 2025 could potentially increase by over 30%. Ultimately, there is a chance to achieve the target metrics of a 78% gross profit margin, 58% operating profit margin, and earnings per share of $60.
Therefore, Citigroup has raised Broadcom's target price to $1100.
While the surge in Broadcom's stock price is somewhat related to Citigroup's research report, the reality is that the company explicitly mentioned in last Thursday's earnings report that AI revenue is set to increase from 15% of semiconductor solutions to 25%. When translated into the overall revenue share, this aligns closely with Citigroup's analysis.
Hence, Broadcom's substantial surge is largely attributed to institutional investors playing catch-up in their position adjustments, with the research report merely adding a finishing touch to the overall momentum.
Following the substantial surge, the question arises: Is Broadcom still a viable buy?
From the revenue structure perspective, Broadcom primarily operates in semiconductor solutions and infrastructure software. The former encompasses 25 product categories, classified into five major groups: broadband, networking, wireless, storage, as well as industrial and automotive. This includes products such as set-top boxes and modems for broadband operations, Ethernet switching chips for data centers, RF front-end modules and FBAR filters for mobile devices, RAID controllers for storage, and motion control products for industrial and automotive applications among the 25 categories. The latter mainly includes mainframe software, network security, and FC SAN storage.
In the fiscal year 2023, the semiconductor solutions account for 78.7% of the total revenue, while infrastructure software constitutes 21.3%:
Looking at the historical revenue, Broadcom has demonstrated exceptional growth, achieving a staggering compound annual growth rate (CAGR) of 30.4% over the past decade:
The change on the profit front is even more astonishing, with the gross profit margin rising from an early-year 30% to an impressive 69%. The adjusted net profit margin has reached an astounding 39.3% in the fiscal year 2023:
Behind the astonishing growth is Broadcom's aggressive strategy of mergers and acquisitions, such as the acquisition of Avago Technologies, the former Broadcom. This move was referred to as a "snake swallowing an elephant" at the time.
During this period, the company sequentially acquired Infineon's fiber optics and acoustic wave filter businesses, with a focus on enterprise storage through LSI and Emulex. In 2017, it acquired the fiber channel giant Brocade. Starting in 2018, Broadcom shifted its focus from vertical integration to horizontal acquisitions, transitioning from hardware-centric targets to software.
The company has undertaken successive acquisitions, including CA Technologies, the enterprise security division of Symantec, and concluded a significant acquisition of the major cloud management enterprise VMware $VMware(VMW)$ in 2023.
In 2017, Broadcom had planned a $130 billion acquisition of Qualcomm, which ultimately failed due to concerns raised by then-President Trump, who cited potential national security risks associated with the acquisition.
While Broadcom is known for its aggressive acquisition strategy, the post-merger business integration has been notably successful, often achieving a synergistic effect where 1+1 is greater than 2. From the perspective of the total asset return rate, Broadcom's profitability has seen a substantial improvement:
In terms of AVGO/EBITDA, the acquired debt can be rapidly absorbed:
Post the acquisition of VMware, Broadcom foresees a revenue projection of $50 billion for the fiscal year 2024, reflecting a substantial growth of 39.7% compared to the fiscal year 2023.
Due to the series of integrations that follow acquisitions, there will be some associated expense outlays. Consequently, the growth on the profit side may not match that of revenue in the short term.
However, looking at the long term, considering VMware's significantly higher gross profit margin compared to Broadcom, successful integration is expected to substantially contribute to Broadcom's profitability:
generous. The target dividend for the fiscal year 2024 is $21 per share, setting a historic record and marking the thirteenth consecutive annual dividend increase since the fiscal year 2011:
Broadcom's data in all aspects is truly impeccable. In terms of market capitalization, the company ranks only behind NVIDIA $NVIDIA Corp(NVDA)$ and TSMC $Taiwan Semiconductor Manufacturing(TSM)$ , firmly establishing itself as a heavyweight in the semiconductor industry.
From a price-to-earnings perspective, the valuation has reached 30 times after the significant surge. Considering the company's growth and the long-term profit from integrating VMware, a Broadcom at $1000 is certainly not the peak moment:
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