Broadcom earnings spotlight tech's growing AI 'dichotomy'

By Emily Bary

The chip company's AI business is outperforming, but other semiconductor markets remain weak

There's artificial intelligence, and then there's everything else.

That's essentially Wall Street's takeaway from Broadcom Inc.'s (AVGO) earnings, as the chip and software company called out growing contributions from AI but sharp pressure in areas like broadband and storage.

And Broadcom isn't alone, Baird's Tristan Gerra suggested. "Strength in AI is more than offsetting incremental weakness in broadband and storage, reflecting on the dichotomy in demand between AI and the rest of the market," he wrote Friday, as he kept his outperform rating on Broadcom shares and boosted his price target to $1,500 from $1,265.

See also: Broadcom's stock falls, with AI set for stronger showing as other areas sag

On balance, investors appears a bit disappointed, with Broadcom shares off about 2% in premarket trading Friday, admittedly after they had run roughly 50% higher over the past three months.

Bernstein's Stacy Rasgon commented that the building weakness in Broadcom's core business was not particularly surprising "given what we have heard recently from peers and (non-AI) customers."

Still, he thinks Broadcom by now has reset expectations for those businesses, while its AI positioning makes the stock look compelling.

Broadcom's "AI story is more than just a simple narrative, but is contributing meaningfully to financial results," Rasgon wrote. "And management sounded more bullish than ever on VMware (and we got the impression that holding the software guide was simple conservatism, with upside potential as we go through the year)."

Rasgon has an outperform rating on Broadcom's stock, and he lifted his price target on it to $1,600 from $1,250 in a Friday report.

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Raymond James' Srini Pajjuri said he was "impressed with the way [Broadcom] managed to successfully navigate through cyclical headwinds," while offering that Broadcom's "AI custom silicon leadership positions the company well for long-term growth."

But he had concerns about the outlooks for the other portions of the business.

"On the other hand, we do not expect a quick recovery in non-AI semis and believe that the double-digit growth target for [VMware] could prove optimistic," he wrote, while maintaining a market-perform rating on shares.

Susquehanna's Christopher Rolland noted that Broadcom's networking business "continues to surf the AI tsunami," and he was encouraged that the company upped its AI revenue target to more than $10 billion from about $7.5 billion for this fiscal year.

That "may be driven in part by a second customer for AI accelerators," he offered, opining that the customer could be Meta Platforms Inc. (META) since Hock Tan just joined the Facebook parent's board of directors.

Rolland has a positive rating on the shares, and he increased his target price to $1,650 from $1,550 in his Friday morning report.

Read also: Marvell's stock drops as AI momentum is outweighed by pressure elsewhere

-Emily Bary

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03-08-24 0822ET

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