Broadcom’s (AVGO) Alternative AI Solution Could Be Stiff Competition for NVIDIA.

Stock (Symbol)

Broadcom (AVGO)

Stock Price

$1238

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) alternative AI interface could become stiff competition to NVIDIA. Last month, AVGO hosted an Enabling AI Infrastructure Investor Meeting. I was blown away a the info the company delivered. 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. There is essentially a network inside an AI server, with 8 to 12 XPUs, ethernet devices, CPUs, and solid state hard drives. Much of this is manufactured by Broadcom already. And the company 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 intregrated circuits, or ASICs, that use less energy. In addition, Broadcom refers to AI accelerators as XPUs instead of NVIDIA’s GPUs. Aspects os an XPU include compute (optimizing flow), memory (the correct size, cooling, testing), and input/output (chiplets that match precision and ratio for workloads), and packaging (coded software to run like a machine). Broadcom is getting a lot of revenue from AI buildouts as well. Last quarter, in semiconductors, AI revenue quadrupled year-over-year.

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.

AVGO has two business segments:

• Semiconductor Solutions (sales up 4% last qtr, accounted for 62% of total sales): This 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.
  • Networking (sales +46% year-over-year, 45% of total semiconductor sales)
    • The growth was largely driven by strong demand for AVGO’s custom AI accelerators at their 2 hyperscale customers.
  • Wireless (sales -4% year-over-year, 27% of semiconductor sales)
    • Engagement with a North American customer continues to be very deep, strategic and multiyear.
  • Server/Storage (revenue declined -29% year-over-year, 12% of semiconductor sales)
    • AVGO expects server storage revenue to decline due to weaker demand in first half but expects recovery in the second half
  • Broadband (sales -23%, 13% of semiconductor sales,)
    • AVGO is seeing a cyclical trough this year for broadband as telco spending continues to weaken and do not expect improvement until late in the year.
  • Industrial (sales -6%, 3% of semiconductor sales)
• Infrastructure Software (sales up 153%, accounted for 21% of total sales): This division provides businesses software to integrate, optimize and secure their operations, including Symantec software that protects organizations from cyber threats. Software competitors include Atlassian, CrowdStrike, CyberArk, Microsoft, Salesforce, ServiceNow ad Zscaler. Broadcom just closed its deal to acquire VMware, which provides multi-cloud services for all software apps, virtual technology, and x86 server-based computing. The acquisition of VMware will take Broadcom’s software segment from 1/4 of company revenue to 1/2. 
  • With respect to infrastructure software, revenue contribution from consolidating VMware drove a sequential jump in revenue by 132%.

The great thing about AVGO stock is the company is making good profits and the stock is reasonable with a P/E of 26. The Estimated Long-Term-Growth (LTG) Rate is 14%. AVGO also pays a nice dividend of 2%. Management even buys back stock. The company buys back stock and has a dividend policy of pacing 50% of the prior-year’s free cash flow to investors. In late 2023 management increased the dividend 4% to a targeted $21 for Fiscal 2024, the 13th consecutive year of increases. AVGO is part of the Growth Portfolio.

One Year Chart

This stock continues to push higher. Just a steady climb, even as profit growht has slowed.

Notice profits have been up every year going back to 2015.

The Est. LTG is 14%. The P/E of 26 is good. I think the P/E should be 30.

Note qtrly profit grow

hht is expected to accelerate two quarters from now.

Earnings Table

• Semiconductor: 62% of total revenue, +4% growth.
• Software: 38% of total revenue, +153% growth.

Growth was driven by Infrastructure Software segment with +153% growth, which includes VMware. In semiconductor segment, growth was mainly driven by network revenue which grew 46% driven by strong demand from custom AI accelerators at AVGO’s two hyperscale customers. This strength extends beyond AI accelerators as Tomahawk 5 800G switches, Thor 2 Ethernet NICs refinements, DSPs and optical components are experiencing strong demand.

Annual Profit Estimates slightly increased this qtr. For 2024 outlook, AVGO reiterate guidance for consolidated revenue to be $50 billion, which represents 40% year-on-year growth. 

Qtrly Profit Estimates for the next 4 qtrs are 4%, 12%, 20%, and 26%. For next qtr, analysts expect revenue to grow 38% due to VMware’s strong performance. The company is seeing cyclical weakness in broadband and server storage, but AI is making up for that.

Fair Value

AVGO stock has been undervalued for a decade now. I bought it for clients in March 2022 around $600 when the P/E was 17.

My Fair Value P/E for this stock is 30. And the stock has a 26 P/E right now.

I think the shares are worth $1403 this year and $1706 in 2025.

Bottom Line

Broadcom (AVGO) has a great looking ten-year chart. But the recent success made the shares go parabolic. The stock needs to to build a healthy base.  

I’m taken back by the ammount of AI info the company gave investors at its AI Infrastructure Investor Meeting. Companies are buying into this strategy. 

AVGO moves from 25th to 18th in the Growth Portfolio Power Rankings. The stock will be put on the radar for the Aggressive Growth Portfolio.

Power Rankings

18 of 33

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A