Broadcom Earnings: Impressive Outlook for AI Revenue

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $190.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Earnings

Broadcom AVGO reported October-quarter revenue of $14.1 billion, up 8% sequentially. In the longer term, management also estimated its serviceable addressable market for artificial intelligence chips at its three largest customers to be $60 billion-$90 billion in fiscal 2027.

The bottom line: We’ve raised our fair value estimate for Broadcom to $190 per share from $155 as we raise our AI revenue growth forecast. We now see shares as roughly fairly valued after a 15% jump after hours in response to strong results and guidance.

• We now forecast nearly 40% annual revenue growth for Broadcom’s AI chips through fiscal 2029, including more than 50% annual growth through fiscal 2027. This puts us on the conservative end of management’s SAM. We model $44.2 billion in AI chip revenue in fiscal 2027.
• To buy Broadcom shares today, we think investors must believe in the midpoint or upper end of management’s SAM and expect Broadcom to retain a 70% share of this opportunity.

Why it matters: Broadcom’s SAM estimate for fiscal 2027 implies significantly higher AI revenue growth over the next three years than we expected, at a roughly 62% annual rate from fiscal 2024.

• We believe Broadcom has a path to a majority share of this future SAM. Management estimates its fiscal 2024 SAM to be between $15 billion and $20 billion, which implies Broadcom holds a roughly 70% share with $12.2 billion in fiscal 2024 AI chip revenue.
• We see potential upside to management’s SAM, given Broadcom has just begun working with two more custom AI accelerator customers (who we believe to be Apple AAPL and OpenAI) and sells its merchant networking chips for AI to a wider customer base.

Big picture: Broadcom’s impressive outlook for AI revenue adheres to our long-term thesis that the firm possesses differentiated chip design capabilities for high-performance networking and computing that allow it to capitalize on significant cloud investment and take market share.