11. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Shareholders In Q1 2024: 115
Broadcom Inc. (NASDAQ:AVGO) is another semiconductor company, and one which designs and sells signal processing products. It’s quite a hot AI stock, and Morgan Stanley’s June 2024 analyst note which cut AMD’s share price target was careful to mention that Broadcom Inc. (NASDAQ:AVGO) might be a good play in the large cap segment. BofA concurred with the optimism in the same month, as it reiterated a Buy rating and a $1,680 share price target for Broadcom Inc. (NASDAQ:AVGO). The bank shared that Broadcom Inc. (NASDAQ:AVGO)’s earnings, which have since been released would mark a beat and a $50 billion guidance in full year sales. The actual results saw Broadcom Inc. (NASDAQ:AVGO)’s $10.96 in adjusted EPS and $12.49 billion in revenue beat analyst estimates of $10.84 and $12.03, respectively. The full year guidance sat at $51 billion, and the stock was up y 15% in aftermarket trading.
Broadcom Inc. (NASDAQ:AVGO)’s stable business and the potential to capture the AI market is also reflected in its forward price to earnings ratio of 31.85. This indicates that while investors do expect some growth in the future, when compared to other semiconductor stocks, the growth will be relatively tepid. Baron Funds mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q1 2024 investor letter. Here is what the fund said:
Historically, Broadcom’s semiconductor business has been a market-leading franchise with high margins and market-level growth, but the emergence of AI-related demand has spurred stronger growth across its portfolio, specifically in its Networking business unit. Broadcom’s AI-related revenue has grown from less than 5% of its semiconductor business to an expected 35% in its fiscal 2024 as its industry-leading Ethernet switch silicon business and, more importantly its custom silicon solutions, primarily the TPU for Google but with two additional customers ramping as well, have grown significantly. While custom chips tend to be less versatile and flexible than GPUs, their adoption makes sense if customers have large scale workloads with algorithms that are relatively stable, as they allow hyperscale customers to save costs on both upfront capex as well as on energy consumption. Over time, we believe that custom silicon solutions will obtain a noticeable market share of internal AI workloads, with Broadcom as the main beneficiary given its 10-year history of working with its customers, leading to a higher proportion of sales related to AI and an above-market growth in the company’s semiconductor solutions business.
Its software business is also now a more significant portion of revenues with its recent acquisition of VMWare (40% of revenues in fiscal 2024). While Broadcom is implementing its usual strategy with software acquisitions in pursuing cost synergies, in VMWare’s case, the company is also investing in the product and reducing the hurdles for up-selling customers from the basic VSphere product (server virtualization) to the broader VMWare offering including networking, storage, and a management layer, while transitioning customers from license to subscription models. This, in our view, should drive noticeable growth for the software segment in the coming years. These tailwinds would lead, in our view, to strong earnings growth and a re-rating in the stock’s valuation, creating an attractive opportunity for long-term investors.
These tailwinds are supported by a growing stream of free cash flow, an increasing dividend, and a decline in the overall share count as Broadcom continues to repurchase its own stock.
