Broadcom Earnings: AI Revenue Is Accelerating

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $1,090.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Earnings

We’ve raised our fair value estimate for Broadcom AVGO to $1,090 per share from $970, primarily based on 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 stock remains 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 we advise investors to seek a better entry point.

January quarter sales rose 34% year over year and 29% sequentially to $11.96 billion, with a significant contribution when including VMware. Positively, organic sales excluding VMware rose 11% year over year, which we credit almost entirely to AI networking chips. Networking chip sales rose 46% year over year to roughly $3.3 billion, with $2.3 billion coming from AI. Broadcom’s chip businesses declined outside of networking, driven by softer consumer and telecom customer demand. VMware contributed to results for 10.5 weeks out of 14 weeks in the quarter, and we believe it is tracking to $13 billion in sales this year, up from our prior estimate of $12 billion.

Broadcom maintained its guidance for $50 billion revenue for fiscal 2024, which implies higher AI revenue offsetting weak chip demand elsewhere and the inorganic inclusion of VMware. We expect Broadcom’s broadband, storage, wireless, and non-AI networking chip sales to return to growth in fiscal 2025 after the current market weakness, and we see AI driving higher growth in the long term.