Predicting Broadcom's Position in the Next Three Years
With Broadcom's (AVGO 3.50%) earnings in the spotlight for tech investors, let's take a long-term view and investigate where the stock might stand in three years, rather than focusing on its short-term fluctuations.
Let's delve into this tech company, its operations, and where its stock might be heading.
The Acquisition Behemoth
Broadcom's penchant for acquisitions is well-known. If the company's ticker symbol "AVGO" leaves you puzzled, it actually stems from Avago's acquisition of Broadcom in 2016. Avago retained its ticker symbol but adopted the Broadcom name post-acquisition [1].
Before the Avago-Broadcom union, Avago, originally part of Hewlett-Packard, made notable acquisitions like LSI and Infineon's Polymer Optical Fiber business. Subsequently, it acquired Brocade in 2017 and later shifted its focus to software companies, acquiring CA Technologies and cybersecurity firm Symantec [1]. Most recently, Broadcom made headlines with its $86.3 billion deal for VMware.
These acquisitions have diversified Broadcom's offerings significantly. In the semiconductor division, it provides ethernet and switches, fiber optics, and broadband access solutions, among others. On the software side, Broadcom offers cybersecurity, database management, SAN management, cloud computing, virtualization, and payment authentication solutions [1]. Presently, Broadcom operates in 26 diverse segments, which encompass both semiconductor and software infrastructure.
AI Transformation
Broadcom's largest business revolves around networking, and it has been reaping benefits from the ongoing AI transformation. Though Nvidia's GPUs have been the primary recipients of the AI buildout, they are not the only component required for GPU clusters. Broadcom contributes crucially with switches and NICs (network interface cards) [1].
As clusters expand, Broadcom foresees an impending distributed compute challenge demanding a solution, making the networking element increasingly significant. Moreover, Broadcom designs custom chips (ASICs) for specific clients, such as Alphabet's Tensor Processing Unit for AI workloads. It anticipates an upsurge in demand for customized silicon for running AI workloads more efficiently than general GPUs [1].
Analysts from Morgan Stanley are optimistic about this opportunity, projecting Broadcom's ASIC revenue to surge from $3 billion in fiscal year 2023 to $10 billion in fiscal year 2025 [1]. This bullishness arises from the recent addition of two new clients, alongside Alphabet.
Broadcom's AI business has demonstrated impressive growth, with Q2 (ended May 5) AI revenue skyrocketing 280% year-over-year to $3.1 billion [1].
Mixed Performances in Other Businesses
While Broadcom's AI division has been experiencing breakthroughs, other segments have been grappling with challenges. Broadcom blames cyclical weakness in enterprises and telco markets as the primary reason behind these struggles. However, the company believes that service storage revenue and broadband revenue are on the verge of recovery [1].
Consequently, despite the significant AI revenue surge, Broadcom's overall revenue, excluding VMware, only rose by 12% in fiscal Q2.
VMware, acquired in the recent past, is in the midst of transitioning its software products to a subscription service. Approximately 3,000 of its largest 10,000 customers have already signed up to establish a self-service virtual private cloud on-premise. Broadcom's expertise in integrating acquisitions is crucial for this transition, which appears to be a promising strategy for the long term [1]. It has also released tools for its software-defined edge products to facilitate edge computing customers in deploying AI tools.
The Three-Year Outlook
AI serves as Broadcom's prime growth opportunity over the next few years. This includes its innovative networking solutions and customized chips as clusters grow in complexity. Broadcom has to remain vigilant while waiting for its more commoditized businesses to recover. Furthermore, Broadcom anticipates VMware's revenue to double-digit growth over the following three years [1].
This growth potential is the main reason analysts are estimating Broadcom's earnings per share to escalate from a projected $4.75 in this fiscal year to $8.59 in fiscal 2027, approximately three years forward.
Broadcom's stock has traded within a wide P/E range of around 25 to 75 times over the previous five years. Sitting at the middle of this range, the stock is estimated to cost around $430 if Broadcom can meet the projected earnings growth.
Sources:[1] https://seekingalpha.com/article/5085694-broadcom-stock-could-end-up-being-worth-430-by-fiscal-2027[2] https://passive-investing.com/broadcom-corporate-structure-and-division-breakdown/[3] https://finance.yahoo.com/news/broadcom-crushes-q2-earnings-expectations-223616635.html[4] https://seekingalpha.com/article/5164141-why-broadcoms-shared-network-virtualization-initiative-makes-sense-and-why-cisco-will-hate-it
Given the current focus on Broadcom's earnings and future prospects, consider these two sentences:
Investors looking to allocate their money in the tech sector might consider Broadcom, considering its potential growth in AI and network solutions over the next few years. With its strategic acquisitions and focus on AI-driven technologies, Broadcom is positioning itself well in the finance world, seeking long-term investments.
