Broadcom's artificial intelligence chip business is growing like gangbusters, but its non-AI chip business is lagging. That was the main takeaway for Broadcom stock investors after the company's fiscal second-quarter report.
Late Thursday, the fabless chipmaker and infrastructure software provider narrowly beat estimates for its fiscal Q2 and with its guidance. Broadcom earned an adjusted $1.58 a share, up 44% year over year, on sales of $15 billion, up 20%, in the quarter ended May 4.
The Palo Alto, Calif.-based company's AI chip revenue grew 46% to more than $4.4 billion. For the current quarter, Broadcom is targeting AI chip sales of $5.1 billion, up 60% from the year-ago period.
Broadcom sees total company sales rising 21% to $15.8 billion in the quarter ending Aug. 3.
Broadcom currently is supplying custom AI chips for Alphabet's Google, Facebook parent Meta Platforms and TikTok owner ByteDance. It has four other prospective customers, likely Apple, Arm, OpenAI and xAI, according to analysts.
"These partners are still unwavering in their plan to invest, despite the uncertain economic environment," Chief Executive Hock Tan said on a conference call with analysts. "In fact, what we've seen recently is that they are doubling down on inference in order to monetize their platforms."
Tan said he expects Broadcom's fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026. The segment includes AI accelerators and networking chips.
Non-AI chips are another story though, with revenue down 5% year over year to $4 billion in Q2. Broadcom expects revenue in the segment to remain at $4 billion in Q3.
"Non-AI semiconductor revenue is close to the bottom (and) has been relatively slow to recover," Tan said.
Meanwhile, Broadcom's infrastructure software business saw sales increase 25% year over year to $6.6 billion in Q2. Growth was driven by customers moving to VMware Cloud Foundation subscriptions.
AI Chip Stocks Are Leading
Top-performing semiconductor stocks this earnings season mostly have been those tied to the AI megatrend. In addition to Broadcom, others in the group include Nvidia, Taiwan Semiconductor Manufacturing, Astera Labs and Credo Technology.
One overhang on Broadcom stock is the possibility that the U.S. government could restrict sales of custom AI chips to China as it has done with merchant silicon from Nvidia and AMD.
Morgan Stanley analyst Joseph Moore said the China export control issue has not been "derisked" for Broadcom. Action by the U.S. government would impact Broadcom's business with ByteDance, he said.
"Broadcom said they cannot say they are unaffected by such controls (which is different than the language a quarter ago)," Moore said.
On the stock market today, Broadcom stock dropped 5% to close at 246.93.
Broadcom Stock Gets Price-Target Hikes
Still, many Wall Street analysts liked what they heard from the tech giant.
At least 18 analysts raised their price targets on Broadcom stock after the company's earnings report.
UBS analyst Timothy Arcuri kept his buy rating on Broadcom stock and upped his price target to 290 from 270.
"The AI demand commentary on the call was very bullish," he said in a client note.
Bernstein analyst Stacy Rasgon reiterated his outperform rating on Broadcom stock and raised his price target to 295 from 250.
"The AI part of the business appears set to continue its run into 2026, with the company seemingly suggesting AI sales next year in the ballpark of about $30 billion, $4-5 billion above current sell-side consensus and suggesting potential for numbers to inflect higher amid a continued solid engagement pipeline," Rasgon said in a client note. "This (far) more than offsets persistent core semi weakness (which itself presumably should start to get better eventually). And VMware continues to overdeliver, with solid growth set into next year as well."
Truist Securities analyst William Stein maintained his buy rating on Broadcom stock and increased his price target to 295 from 267.
"The most important positive takeaway" from Broadcom's earnings report is that the company believes its AI revenue growth, in the high 50% range this fiscal year, will persist into next year "based on improved visibility and accelerating inference demand," Stein said in a report.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
