(Bloomberg) — As skepticism about artificial intelligence trading grows on Wall Street, bulls are expecting results from chipmaker Broadcom Inc. (AVGO) to trigger a reset.
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The company is set to report after the close, and if it confirms that demand for AI is still strong, it could help calm investor nerves. Nvidia Corp.’s (NVDA) results last week missed lofty expectations, prompting a selloff in AI stocks, while concerns about when companies’ spending on the new technology will pay off have been a theme throughout earnings season.
“Broadcom is well positioned to come to the rescue of the market,” said Chris Barto, senior investment analyst at Fort Pitt Capital Group, who noted that the company is well-run and diversified while trading at a lower valuation than most AI-exposed stocks. “It never got the hype that companies like Nvidia did, but I think this quarter’s results will reinforce the idea that AI isn’t going to be a short-term spending spree.”
Broadcom, a supplier to Apple Inc. (AAPL) and other major technology companies, cemented its status as a major beneficiary of AI spending last quarter, as revenue from AI products reached a record $3.1 billion — about a quarter of total revenue.
For fiscal 2024, Chief Executive Officer Hock Tan forecast AI-related sales of more than $11 billion — a forecast that analysts at Citigroup expect to increase today. Total revenue for the year is expected to rise 44% to about $52 billion, according to data compiled by Bloomberg. That would outpace the overall chip sector, which will see revenue growth of about 26%, according to Bloomberg Intelligence.
“The first wave of AI spending was about processing power, chips and servers, but the next wave is going to be about connecting data centers, and that’s where Broadcom fits in,” said Aash Shah, senior portfolio manager at Summit Global Investments. “That kind of capex is still in its infancy, and it’s definitely underrated how much of it Broadcom can capture.” Shah said Broadcom is one of his favorite stocks.
The AI tailwind has helped the stock this year, with shares up 38% even after a volatile few months, making Broadcom one of the best-performing stocks on the Philadelphia Stock Exchange Semiconductor Index, which is up 14%. The options market is implying a 6.7% move in either direction for Broadcom shares following the report.
Despite this year’s gains, the shares are still cheaper than other AI companies including Nvidia, Advanced Micro Devices Inc. (AMD) and Arm Holdings Plc. (ARM), trading at about 26 times estimated earnings.
“Relative to the more pure-play AI names, Broadcom is acting a little defensive,” said Melissa Otto, head of TMT research at S&P Global Visible Alpha. “It’s trading at a lower valuation and has more diversified businesses, although it’s also aligned with this fantastic AI theme that’s seeing a lot of growth.”
That growth potential, coupled with a less demanding multiple, is why Broadcom is so beloved on Wall Street, with nearly 90% of analysts tracked by Bloomberg recommending buys. The average price target implies gains of more than 25% over the next 12 months.
“It may not have the upside that you see elsewhere, but it also doesn’t have the downside risk,” Otto said. “It’s an AI game for those who don’t want a savage.”
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—With assistance from Henry Ren.
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