By Adam Clark
One artificial intelligence chip maker's earnings have landed with a bang. It was Broadcom, not Nvidia, who jolted the market this time.
Broadcom shares were up 20% at $217.45 in Friday trading following its fourth-quarter earnings report, pushing its market value above $1 trillion for the first time. The stock needs to close at or above $214.11 to hold that level.
Broadcom makes processors across the networking, broadband, server storage, and wireless sectors, as well as owning software business VMware. However, the part of Broadcom's business that is getting the market excited is its position in high-end ASICs -- application specific integrated circuits -- that can be used as custom AI chips.
Broadcom said it had been selected by two more large customers to help develop their next-generation AI chips. The new customers are likely to be Apple and ChatGPT-developer OpenAI, on top of existing clients Google-parent Alphabet, Meta Platforms, and TikTok-parent ByteDance, according to analysts at William Blair.
Reactions across Wall Street were nearly all positive as analysts focused on the potential for Broadcom to benefit from huge investment in AI data centers. However, the stock's near doubling this year appears to be testing the limit of analysts' optimism as the average target price now sits at $217.20, according to FactSet, even after a raft of upgrades following the latest report.
"We continue to see a favorable risk/reward equation, as Broadcom rides the tailwinds around Ethernet networking, custom AI chips, and higher VMware licensing revenues, all the while pushing significant cash to the bottom line and returning it to shareholders through dividends and share repurchases," wrote William Blair analyst Sebastien Naji on Friday, who kept an Outperform rating on the stock.
AI sales within Broadcom's semiconductor segment amounted to $12.2 billion for its fiscal year, more than triple the previous year. That compares with the company's overall annual revenue of $51.6 billion, which was up 44%. It expects its AI chip market to keep growing at a similar rapid clip for the next two years.
"How do you make it so no one cares about 1Q seasonality or losing a little WiFi revenue from Apple? Win 2 more silicon customers for XPUs and say that your AI serviceable addressable market...hits $60-$90 billion by FY27 [fiscal year 2027] with only your three existing custom silicon customers," wrote Melius Research analyst Ben Reitzes on Friday in a research note.
Reitzes has a Buy rating on Broadcom stock with a $255 price target, based on a price-to-earnings multiple of 28 times his forecast for the company's earnings in fiscal 2027.
A note of warning was sounded by Raymond James analyst Srini Pajjuri, who said that investment in custom chips could be muted in the first half of 2025, while Broadcom's market assumptions are based on each of its existing three customers building clusters of one million chips networked together.
Pajjuri kept a Market Perform rating on the stock and said he prefers Nvidia, Marvell Technology, and Advanced Micro Devices as plays on the growth of AI data centers.
Write to editors@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 13, 2024 11:57 ET (16:57 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
