To The Moon

If you were at the sideline thinking of buying $Broadcom(AVGO)$ shares, now the company have provided more reasons why it is time to seriously consider to buy this stock.

After Broadcom announced a 10:1 stock split in its record-breaking fiscal Q2 results, Broadcom now expects this performance to continue, fueled largely by demand for its artificial intelligence (AI) solutions. While Broadcom does not make the same chips as $NVIDIA Corp(NVDA)$, it does build components that are critical for networking applications including those needed in AI data centers around the world.

ASIC Chips Design For AI Applications - Broadcom Forte

Since the early 1990s Broadcom has been around, they design ASIC chips for AI applications. Broadcom has a history of growing its revenue hand over fist. Over the past five-year period, Broadcom’s annual revenues have increased by 58% to hover at $35.8 billion as of year-end 2023.

With the AI winds in its sails, Broadcom is forecasting even more revenue growth in its current fiscal year to put it over the top.

While Broadcom’s stock has already gained close to 60% year to date, for a market cap of $807 billion and rising, there is reason to believe there’s more room left in the tank, making AVGO a compelling opportunity.

In this article, I would like to share with you why I think we should consider buying broadcom now.

Broadcom’s Upcoming Stock Split

Broadcom is preparing for a 10:1 forward stock split of its shares, which are currently hovering at $1,678 per share. The stock, which will begin trading on a split-adjusted basis on 15 Jul 2024, has already risen significantly by nearly 60% year-to-date, but the stock split serves as yet another catalyst that is likely to embolden the Broadcom bulls. Broadcom has not completed a stock split since its 2016 acquisition of Avago and appears to have been waiting for the perfect time. Considering the excitement around generative AI, which is a commanding part of Broadcom’s total revenue, investors are likely to find it was worth the wait.

Guidance For Revenue Growth Lifted

Since its acquisition of Avago, Broadcom’s revenue took a sharp upward turn, increasing from $17.6 billion in 2016 to $38.87 billion in 2023. In fiscal Q2,

Broadcom reported revenue of $12.5 billion, a 43% increase year-over-year and beating consensus estimates, fueled by a combination of AI demand and its VMware segment. Revenue from Broadcom’s AI segment hit a fresh all-time high at $3.1 billion, a 281% increase, offsetting any weakness from the enterprise and telecom segments.

In response, management lifted its full-year consolidated revenue guidance to $51 billion, up from a previous prediction of of $50 billion, and increased their outlook for AI-based revenue from $10 billion to $11 billion.

Benefiting From Insatiable AI Demand

Broadcom is right in the middle of the AI boom, reaping the benefit as a chip solutions company. With an impressive set of clients for its AI chip segment including names like Alphabet (GOOGL) $Apple(AAPL)$ and Meta, these clients are going to keep increasing Broadcom revenue.

Apple contributed roughly one-fifth of its revenue last year and is Broadcom’s biggest customer, with Apple partnership with OpenAI, the demand for Broadcom’s solutions would only grow bigger. Recently Broadcom management have hinted at yet another client for its AI solutions.

With speculation from Wall Street that it might be China’s ByteDance, maker of the TikTok app. Broadcom is also strategically positioned for the transition of AI data centers to bandwidth with speeds of 800 Gbps, benefiting its digital signal processors, optical lasers and PIN diodes.

Contribution From VMWare Boost Broadcom Infra Software Revenue

After Broadcom acquired VMWare in 2023, it has increased its competitive position in enterprise software. VMWare brings its cloud computing prowess to the relationship, allowing Broadcom to harness expertise on both the hardware and software sides of the table.

Broadcom’s Q2 infrastructure software revenue increased to $5.3 billion, up 175% year-over-year. This performance included a $2.7 billion contribution by VMWare as more businesses integrated its software stack for their own cloud purposes.

Broadcom management says the integration of VMWare is going smoothly, while the company transitions the software company’s products to a subscription model.

Wall Street Bullish On Broadcom

Wall Street are highly bullish on Broadcom stock, with 23 “buy” ratings in the past 3 months and zero “sells”. With an average price target of $1,883,.25 analysts believe Broadcom stock offers 8.5% upside potential on top of its double-digit-percentage gains so far this year.

Among the most bullish analysts on AVGO stock is Oppenheimer’s Rick Schafer, who in response to the company’s Q2 report lifted his price target by 33%, from $1,500 to $2,000, with an “outperform” rating on the stock. with a high forecast of $2,100.00 and a low forecast of $1,500.00. The average price target represents a 8.54% change from the last price of $1,735.04.

Not to be outdone, Bank of America similarly raised its price target on Broadcom to $2,000 while increasing its 2025 revenue forecast to nearly $60 billion. If Bank of America is right, that sales performance would represent a 16% increase over Broadcom’s projected full-year performance in fiscal 2024.

Dividend Paying Stock

While we might look at Broadcom as a growth stock which has invested heavily with $132 million spend in CAPEX in Fiscal Q2, it is also a dividend-paying stock.

In fiscal Q2, Broadcom announced a quarterly cash dividend of $5.25 per share, for which it allocated capital of $2.4 billion. With a dividend yield of 1.14%, Broadcom has a history of raising its distribution amount each year, including a 14% increase in fiscal 2024 vs. year-ago levels.

As a result, we as investor, should feel confident that Broadcom has a proven history of prioritizing shareholder value. With a payout ratio of 45.23% and dividend growth of 14 years, Broadcom directs much of its earnings towards dividends, but it also has the fundamentals that make this model sustainable.

Strong Free Cash Flow -> Solid Liquidity

With a strong cash position and solid liquidity, Broadcom can help put investor like us to feel reassured.

The company ended fiscal Q2 with $9.8 billion in cash and $74 billion of gross debt. In the quarter, free cash flow rose 18% to $5.3 billion excluding merger integration and restructuring costs.

The company’s five-year free cash flow trend is positive, rising from $9.27 billion in 2019 to $18.46 billion last fiscal year, and 87.5% increase. As of 2023, Broadcom had a free cash flow margin of 50%, surpassing that of its peers.

No GPUs Competition With Nvidia

While both Broadcom and Nvidia operate in the semiconductor industry, and both are AI juggernauts, they do not go head to head in this segment, at least on GPUs. Even Broadcom CEO Tan explained on the last earnings call that Nvidia is highly efficient at GPUs, which is the merchant’s “AI accelerator of choice.’

Tan said, “We do not even think about competing against them in that space, not in the least.” Where he does see Broadcom participating in this area is with its IP portfolio for tailored ASIC AI accelerators. He admits, however, on Ethernet networking, the gloves are off.

Summary

I personally feel that with these reason, and outlook and guidance looking positive for Broadcom’s growth, it is strong enough reason to buy into broadcom now.

With the ASIC AI accelerators demand picking up, and we need to remember that these are tailored to each individual company needs, so Broadcom is really in a position that it is capturing the right market.

Appreciate if you could share your thoughts in the comment section whether you think Broadcom would be capturing more major clients as AI wave continue to move towards customization aka tailored solutioning?

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.