Broadcom (AVGO) Breaks Out in Anticipation of its 2027 AI Chip Rollout

Stock (Symbol)

Broadcom (AVGO)

Stock Price

$342

Sector

Data is as of

Expected to Report

Company Description

Broadcom designs, develops and supplies a range of semiconductor and infrastructure software solutions.

It operates through two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions segment includes semiconductor solution product lines, as well as its Internet protocol (IP) licensing.

It provides semiconductor solutions for managing the movement of data in data center, telecom, enterprise and embedded networking applications.

It also provides a variety of radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market.

Its infrastructure software segment includes its mainframe, distributed and cyber security solutions, and its fiber channel storage area networking (FC SAN) business.

Its mainframe software provides DevOps, AIOps, Security and Data Management Systems solutions. Source: Refinitiv

Sharek’s Take

Broadcom’s (AVGO) growth continues to be strong driven by demand for AI semiconductors and custom accelerators. Last quarter, Broadcom’s semiconductor segment achieved 52% year-over-year revenue growth as AI semiconductor revenue surged 106% year-over-year. In the earnings call, management stated demand for AI networking os accelerating. Growth is supported by multi-year engagements with hyperscalers and an expanding customer base that now includes a sixth client, OpenAI. Management anticipates that OpenAI will start deploying custom AI chips (known as XPUs) at scale starting in 2027. Last qtr, Broadcom posted 28% profit growth on a 29% increase in revenue. While the semiconductor segment continues to drive momentum, the infrastructure software business remained largely flat.

Broadcom is a semiconductor and software company that designs thousands of products for home connectivity, cloud data centers, and enterprise businesses. It is a conglomerate that was formed over 50 years of mergers and acquisitions including old-school tech companies AT&T/Bell Labs, Lucent, Hewlett-Packard and its semiconductor division, and younger industry leaders (including Broadcom, LSI, Broadcom Corporation, Brocade, CA Technologies and Symantec). The majority of AVGO’s silicon wafer manufacturing operations are designed in North America or Europe, then outsourced by the company to external foundries in Asia, such as Taiwan Semiconductor. What sets Broadcom apart is that other firms rely on the company to design custom AI chips, known as XPUs, which are made for training powerful AI models. Broadcom’s method for building AI infrastructure is different, as its building a general product that fits everyone’s needs, with hardware from different manufacturers used in the datacenter:

• Broadcom feels it can make AI networks that are designed specifically for the customer that require less energy. Instead of using GPUs for AI, Broadcom utilizes application-specific integrated circuits, or ASICs, that use less energy.
• Broadcom refers to AI accelerators as XPUs instead of NVIDIA’s GPUs. Aspects of  an XPU include:
  • compute (optimizing flow)
  • memory (the correct size, cooling, testing)
  • input/output (chiplets that match precision and ratio for workloads)
  • packaging (coded software to run like a machine)
• Within an AI server, there is essentially a network with 8 to 12 XPUs, ethernet devices, CPUs, and solid state hard drives. (much of this is manufactured by Broadcom already).

AVGO has two business segments:

• Semiconductor Solutions (sales up 52% last quarter, accounted for 65% of total sales):
  • This segment offers digital and mixed signal products that use silicon wafers with computer memory.
  • Products include routers, modems, set-top boxes, WiFi-enabled devices, Bluetooth devices, GPS systems, HDD and SSD storage, and motion control encoders.
  • Its competitors include AMD, Cisco, GlobalFoundries, and Qualcomm.
• Infrastructure Software (sales up 1%, accounted for 35% of total sales):
  
  • This division provides businesses with software to integrate, optimize and secure their operations, including Symantec software that protects organizations from cyber threats.
  • In November 2023, Broadcom acquired VMware, which provides multi-cloud services for all software apps, virtual technology, and x86 server-based computing. The acquisition of VMware took Broadcom’s software segment from around 25% of company revenue to around 45%.

AVGO stock has been amazing the past ten years. The stock currently has an Estimated Long-Term-Growth (Est. LTG) Rate of 50%. AVGO also pays a nice dividend of 1%, and management buys back stock. The company used to have a dividend policy of paying 50% of the prior-year’s free cash flow to investors, but I don’t know if that’s still the case. Management has been more successful in acquiring other companies to grow. AVGO is part of the Growth Portfolio and Focus List. Broadcom is a key contributor to the AI movement, and its stock should be a core holding for growth stock investors.

One Year Chart

AVGO stock has been a warrior lately. These charts were done on 3, 11 when the shares were $342. Today, 4/22, shares broke out to a 52-week and All-Time high and closed at $433.

AVGO has a 31 P/E, down from last quarter’s P/E of 34. I think the stock is worthy of a 35 P/E.

The Est. LTG is 50%, up from 35% last quarter. I think this is maybe a 30% profit grower right now.

Quarterly profit growth has been pretty good the past year, and Estimates are plump as well.

Earnings Table

• Growth was mainly driven by the AI semiconductor revenue spike of 106%, on account of strong demand for custom AI accelerators. Meanwhile, the custom accelerated business rose 140% year on year.
• Broadcom’s infrastructure software revenue rose only 1% year over year, supported by the 13% growth in VMware’s top line.
• Bookings also strengthened, with total contract value exceeding $9.2 billion last quarter, with annual recurring revenue growth of 19% year on year.

Annual Profit Estimates increased this quarter, especially 2027 and 2028. Management says Broadcom’s AI chip revenue is on target to exceed $100 billion by 2027. 

Quarterly Profit Estimates for the next 4 quarter are 50%, 88%, 93%, and 96%. For next quarter, analysts expect revenue to grow 47%, while management forecasts semiconductor revenue to grow 76% with AI semiconductor revenue up 140%. Wow!

Fair Value

This quarter, the stock is $342, giving it a P/E of 31. 

My Fair Value P/E is 35. The shares are around my Fair Value now.

My 2027 Fair Value sits at $594 a share, giving the stock solid upside when we look to next year.

AVGO has a Fiscal Year end of September 30th.

Bottom Line

Broadcom (AVGO) has a great looking ten-year chart. Recent success made the shares go parabolic, as the P/E has inflated.

Broadcom is rolling in AI semiconductor demand. It’s incredible how fast this big company is growing. And qtrly estimates are simply outstanding.

AVGO pushes from 6th to 4th in the Growth Portfolio Power Rankings.

The stock moves from 7th to 4th in the Aggressive Growth Portfolio Power Rankings. NVDA, NBIS, and CRDO are the stocks that lie ahead.

Power Rankings

4 of 28

Aggressive Growth Portfolio

4 of 18

Conservative Stock Portfolio

N/A