Company Reports

We maintain our $1,090 per share fair value estimate of wide-moat Broadcom after its artificial intelligence investor day. The event reinforced our positive view of the firm’s road map for AI chips and generally aligned with our long-term thesis. We believe Broadcom is well positioned to provide semiconductors into AI networks, via its traditional network switch chips and its burgeoning custom accelerator design revenue. We believe the latter is the larger opportunity, and Broadcom announced a third custom-chip customer—a positive, in our view, adding to its existing work with Google and Meta. We still anticipate Broadcom’s AI sales to grow in the double digits in the long term and significantly higher over the next two years. However, we see shares as overvalued. We believe that to justify Broadcom’s current valuation, one would have to model durable growth of close to 50% for its AI sales over the next five years, at minimum.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of firms, big and small. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

We raise our fair value estimate for shares of wide-moat Broadcom to $1090 from $970, primarily behind our higher forecast for the firm’s artificial intelligence chip sales. Management raised its fiscal 2024 AI revenue target and we have also raised our longer-term growth expectations. Broadcom’s other chip markets are experiencing weakness, but we believe AI will more than offset declines elsewhere this year. VMware sales also appear to be tracking ahead of our prior expectations for fiscal 2024, and we maintain our confidence in management’s ability to largely complete its integration by the end of the year. Nevertheless, Broadcom shares remain overvalued in our view. We believe the current pricing implies a $50 billion AI chip business in five years, compared with our forecast, which is nearing $30 billion. We see our forecast as aggressive but more realistic and advise investors to seek a better entry point.

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.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of firms, big and small. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

We raise our fair value estimate for shares of wide-moat Broadcom to $840, from $815, after the firm closed on its acquisition of VMware. We continue to like the deal. In our view, VMware greatly augments Broadcom’s software portfolio, will sustain its wide moat, and enable modestly higher growth into the medium term. Still, we see Broadcom’s valuation as challenging even with a value-accretive deal under its belt.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of firms, big and small. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

We raise our fair value estimate for wide-moat Broadcom to $815 per share, from $790, as we raise our probability of the VMware acquisition closing to 75%, from 50% previously. Our greatest concerns to closing the deal were the U.K. and U.S. jurisdictions, and Broadcom has gained approval in the U.K. and faces no legal challenges in the U.S. We see China as the final regulatory hurdle. Our standalone fair value estimate for Broadcom is unchanged at $740 per share after fiscal third-quarter results met our expectations. The recent surge in artificial intelligence spending at cloud hyperscalers is generating terrific growth for Broadcom’s networking chips, and overshadowing softness in some other semiconductor markets. We remain impressed with Broadcom’s networking portfolio and ability to execute with its customers but continue to see its current valuation as outpacing its fundamentals. We advise investors to wait for a pullback.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of smaller firms. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

We are upgrading Broadcom’s economic moat rating to wide from narrow, based on improved confidence in the durability of Broadcom’s technological lead in smartphone and networking chips and our favorable opinion of the firm as an aggregator that can be more valuable than the sum of its parts. Thanks to a longer runway for economic profits, as well as stronger near-term growth and long-term margin assumptions, we raise our fair value estimate for Broadcom to $790 per share from $640. We also raise our capital allocation rating to Exemplary, to reflect our view of the firm’s terrific investment record, while maintaining a Medium fair value Uncertainty Rating. Despite our higher fair value, we still view shares as overvalued.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of smaller firms. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

Narrow-moat Broadcom reported strong fiscal second-quarter results, slightly below our revenue expectations but significantly surpassing our earnings expectations. Networking demand was again strong on the back of a continued tailwind of generative AI deployment. Management noted that AI-related revenue currently represents approximately 15% of its semiconductor business. In fiscal 2022, that figure was around 10% of its semiconductor revenue, and management believes it can reach 25% of semiconductor revenue in fiscal 2024, an estimate we view as reasonable and impressive. The immediate hesitation to AI-related growth is the potential for cannibalization of its other product growth. However, we view Broadcom's networking, storage, and broadband businesses as resilient and view AI-related revenue as a tool to expand on existing growth vectors. We maintain our $640 fair value estimate for Broadcom, which reflects a 50% probability the firm's pending VMware acquisition will close within fiscal 2023.

Broadcom is the product of consolidation in the semiconductor and software spaces. Most prominent was the combination of Avago Technologies and Broadcom in 2016. Avago’s expertise in radio frequency filters for smartphones and legacy Broadcom’s dominance in networking, broadband, and wireless connectivity created a broad and profitable semiconductor behemoth. Recently, the firm has ventured into software in buying CA Technologies, Symantec's Enterprise business, and has a pending deal to acquire VMware. Longer term, we think Broadcom is part of the heavyweight class of technology leaders and boasts intangible assets around the designs of chips and software that go into a variety of end markets.

Broadcom reported impressive fiscal first-quarter results in line with our expectations, led by strong networking demand. While some of the firm’s peers have observed slowing demand in the data center market, we think Broadcom’s advanced switching, routing, and custom silicon portfolio has allowed it to maintain solid growth. Overall, the company’s networking, storage, and broadband business units have proven resilient, including impressive artificial intelligence-, or AI-related sales in its networking segment. We anticipate healthy spending in support of transformer-based large language models such as OpenAI’s ChatGPT (generative pretrained transformer). We believe these AI models use a variety of networking switches and custom silicon from the likes of Broadcom, with competition between Microsoft, Google, and others supporting our forecast for the firm’s networking segment to grow 12% in 2023.

Broadcom is the product of consolidation in the semiconductor and software spaces. Most prominent was the combination of Avago Technologies and Broadcom in 2016. Avago’s expertise in radio frequency filters for smartphones and legacy Broadcom’s dominance in networking, broadband, and wireless connectivity created a broad and profitable semiconductor behemoth. Recently, the firm has ventured into software in buying CA Technologies, Symantec's Enterprise business, and has a pending deal to acquire VMware. Longer term, we think Broadcom is part of the heavyweight class of technology leaders and boasts intangible assets around the designs of chips and software that go into a bevy of end markets.

Broadcom is the product of consolidation in the semiconductor and software spaces. Most prominent was the combination of Avago Technologies and Broadcom in 2016. Avago’s expertise in radio frequency filters for smartphones and legacy Broadcom’s dominance in networking, broadband, and wireless connectivity created a broad and profitable semiconductor behemoth. Recently, the firm has ventured into software in buying CA Technologies, Symantec's Enterprise business, and has a pending deal to acquire VMware. Longer term, we think Broadcom is part of the heavyweight class of technology leaders and boasts intangible assets around the designs of chips and software that go into a bevy of end markets.

Broadcom reported strong fiscal fourth-quarter results in line with our expectations, boosted by healthy networking demand led by cloud and enterprise data center spending. Despite weaker consumer demand, Broadcom’s networking, storage, and broadband business units have proven resilient, and the firm’s execution on its software acquisitions such as Symantec and CA Technologies is also noteworthy. We expect Broadcom’s wireless segment to continue benefiting from Apple’s latest iPhone 14 launch. While management remains positive on networking demand, we expect Broadcom’s recent momentum to begin decelerating in the coming quarters, particularly at enterprise customers amid a shaky macroeconomic climate.

Broadcom reported strong fiscal third-quarter results slightly ahead of our expectations. The firm’s results were buoyed by healthy networking demand led by cloud and enterprise data center spending. Despite slowing consumer demand, Broadcom’s networking, storage, and broadband business units have proven resilient, and the firm’s execution on its software acquisitions such as Symantec and CA Technologies is also admirable. We think Broadcom’s wireless segment should also benefit from Apple’s upcoming iPhone launch in the fiscal fourth quarter.

On May 26, narrow-moat Broadcom entered into a definitive agreement to acquire narrow-moat VMware in a cash-and-stock transaction that values VMware at $61 billion. VMware investors will receive $138.23 per share, made up of 50% received as $142.50 cash per VMware share and 50% received as 0.2520 shares of Broadcom stock. This represents a 44% premium to the closing price of VMware’s stock on May 20. Given our standalone fair value estimate for VMware is $175 per share, we think Broadcom shareholders are getting a good deal as management takes advantage of the recent technology sector sell-off and VMware’s temporary revenue growth headwinds stemming from transitioning from license to subscription and SaaS.

Broadcom is the product of consolidation in the semiconductor space. Most prominent is the combination of Avago Technologies and Broadcom in 2016. Avago’s expertise in radio frequency filters for smartphones and legacy Broadcom’s dominance in networking, broadband, and wireless connectivity created a broad and profitable semiconductor behemoth. Recently, the firm has ventured into software in buying CA Technologies, Symantec's Enterprise business, and has a pending deal to acquire VMware. Longer term, we think Broadcom is part of the heavyweight class of technology leaders and boasts intangible assets around the designs of products that go into a bevy of end markets.