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Shares of artificial intelligence (AI)-related semiconductor companies have been on an absolute tear in the last 15 months. After trading near multi-year lows in 2022, many of these semiconductor stocks have rallied recently to trade near record highs right now.
One such stock is Broadcom Ltd (AVGO), which is up 110% in the last year and a staggering 2,600% in the past decade, after accounting for dividends. Valued at a market cap of $600 billion, Broadcom is among the largest companies on the planet. Let’s see if the blue-chip dividend stock can touch a valuation of $1 trillion in 2024.
Broadcom Stock Slumps After Q1 Results
Broadcom last week announced its results for the fiscal Q1 of 2024 (ended in January). It reported revenue of $12 billion and adjusted earnings per share of $10.99. Comparatively, analysts forecast Broadcom to report sales of $11.72 billion and earnings of $10.29 in Q1.
The tech giant completed the big-ticket acquisition of VMWare in 2023, allowing it to increase sales by 34% year over year. After adjusting for the acquisition, organic sales grew by 11%, higher than the 4% growth in fiscal Q4 of 2023. Broadcom attributed its accelerating growth rate to strong demand for AI products.
While semiconductor solutions sales rose 4% to $7.4 billion, infrastructure software revenue more than doubled to $4.6 billion. The company increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 26% to $7.16 billion, while adjusted earnings increased by 6.4% year over year.
While Broadcom handily beat estimates in Q1, the stock is down 8% over the last two trading sessions, as it maintained full-year revenue guidance at $50 billion and EBITDA estimates at $30 billion.
AI is Key for AVGO Stock
The artificial intelligence megatrend will be a key driver of revenue and earnings growth for Broadcom in the upcoming decade. In fact, during its recent earnings call, Broadcom CEO Hock Tan emphasized, “Strong demand for our networking products in AI data centers, as well as custom AI accelerators from hyperscalers, are driving growth in our semiconductor segment.”
The company also offers a portfolio of networking solutions that are critical for generative AI tools, such as ChatGPT. Broadcom stated that AI tools accounted for 15% of its chip sales in the last year.
Broadcom expects networking sales to surge by 30% year-over-year due to accelerating deployments of networking connectivity and expansion of AI accelerators in hyperscalers. It also expects generative AI to account for 25% of semiconductor revenue in fiscal 2024.
Is AVGO Stock Overvalued?
Analysts tracking AVGO stock expect sales to rise by 28.3% to $46 billion, while earnings are forecast to expand by 10% to $46.47 in fiscal 2024. Priced at 28x forward earnings, AVGO stock is not too expensive, given earnings are forecast to grow by 13.8% annually in the next five years.
Out of the 26 analysts covering Broadcom stock, 22 recommend “strong buy” and four recommend “hold." The average target price for AVGO stock is $1,282.34, which is marginally lower than the current trading price.
It's unlikely that AVGO stock will touch a $1 trillion valuation this year, unless the AI boom takes off exponentially in the second half of 2024.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
