Broadcom Earnings: Higher AI Forecast and Rapid VMware Integration Lift Valuation to $970 From $840

We raise our fair value estimate for shares of wide-moat Broadcom to $970 from $840. Broadcom reported a good fiscal fourth quarter, but our higher valuation is driven primarily by higher long-term forecasts for artificial intelligence-driven chip sales and more bullish assumptions for the integration of VMware. In our view, Broadcom’s sales growth stemming from AI will more than offset softer demand across its other semiconductor markets in fiscal 2024 (ending in October.) Additionally, we have confidence in management’s aggressive goals for integrating VMware, which implies getting close to Broadcom’s preacquisition margin profile exiting fiscal 2024. Rapidly bringing VMware up to Broadcom’s stellar profit margins would be the latest and largest example of the firm’s impressive acquisition program, which contributes to our wide moat and Exemplary Capital Allocation ratings. At our new valuation, we see shares as modestly undervalued.