Why Investors Are FOMO on AVGO?
Recent trading in $Broadcom(AVGO)$ has been full of FOMO sentiment, and it's pulling down $NVIDIA(NVDA)$ as well.Why are investors so worried about not getting on board?
Broadcom has had a strong last two years
Broadcom (AVGO)$ has had a great last two years, doubling its share price in 2023 and soaring in 2024.Integrating VMware into the business this year was a big deal.Although the integration process was a bit controversial, and was criticized for raising prices and discontinuing some free services, it was good for shareholders.After the integration, VMware's operating expenses were cut in half and gross margins reached 70%.
Broadcom's results were stunning, with future AI revenue expectations exploding
In Q4 2024, Broadcom had a great year, with revenues of $14 billion, up 51% year-over-year.But if you're looking at natural growth, it's not as high.Earnings per share also beat expectations. for Q1 2025, Broadcom gave strong guidance, expecting sales to grow 22% year-over-year, mostly on a natural growth basis, as the VMware acquisition was completed last November, so year-over-year numbers are no longer impacted starting in the first quarter of this year.
Broadcom's results for the quarter greatly exceeded everyone's expectations, and CEO Hock Tan said that Broadcom could reach $60 to $90 billion of serviceable market size (SAM) in AI by 2027, which is a huge number.According to the CEO, by 2027, each customer will have about 20 to 30 billion dollars of AI chip procurement needs.This is much higher than market expectations, which means that Broadcom's AI revenue (including AISC and networking) will almost double every year from now until 2027.
The CEO has expressed optimistic expectations several times before.For example, in July at the JPM roadshow said that Broadcom in the next five years in the AI revenue opportunity of 150 billion dollars.To the September Goldman Sachs conference, he is particularly optimistic about the prospects of ASIC.
Broadcom into the field of AI gas pedal
Broadcom's entry into the high-performance computing logic microchip space is kinda surprising.That's because the big public cloud providers wanted to get into this market, saw Broadcom's expertise in networking chips, and let Broadcom help them develop AI chips (in addition to Amazon working with others).Broadcom is like a car chassis supplier in the supply chain, providing things like networking, and customers are like engine suppliers.Broadcom and Nvidia have competition, Nvidia touts its technology, Broadcom has alternatives and says Nvidia's solutions are inflexible and Broadcom's solutions are more popular with public cloud providers.
Strong Financials and Capital Allocation
Broadcom's cash flow in the fourth quarter of fiscal 2024 was very good, much more than in the same period last year.Broadcom's capital expenditures are low, which is conducive to capital allocation policies that are good for shareholders, such as dividends and stock buybacks.Now Broadcom has to hurry to reduce the debt incurred as a result of the acquisition of VeriSign.
Valuation is reasonable, but the "Apple" risk is also significant
Broadcom's valuation reflects a reasonable growth premium.The public cloud provider's entry into the semiconductor market is large, coupled with the ability to reduce costs, so Broadcom's share price rise is justified.
Broadcom's AI-related sales are growing quickly, and while sustainability is debatable, the risk-reward is decent.
The risks are a potential downgrade if it loses contracts with big customers, and the possibility that $Apple(AAPL)$ could replace more of Broadcom's chips, and reportedly could start phasing out Broadcom's WiFi and Bluetooth technology chips in its future mobile chip program as early as next year.That could start with certain HomePod and Apple TV technologies next year.
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