Broadcom (AVGO) Stock Analysis: Continued Growth in AI and Undervaluation

Broadcom (NASDAQ: AVGO) has seen its stock price increase by nearly 7% since January 2024, outperforming the S&P 500. The company is capitalizing on the AI revolution by expanding its hardware offerings and diversifying its product lines. Furthermore, a discounted cash flow (DCF) model suggests that AVGO is undervalued by 17%, presenting a potential opportunity for investors.

Key Points

AI Revolution and Product Diversification

• Broadcom is enhancing its strategic position in the AI revolution by improving its hardware offerings.
• The company’s products enable connectivity for advanced AI accelerators, which positions Broadcom at the forefront of AI infrastructure.
• Broadcom’s consistent upgrades to its product line support its dominance in high-computing infrastructure.

Strong Financial Performance

• In FQ1 2024, Broadcom delivered strong results with an 11% year-over-year revenue growth (excluding the impact of VMware acquisition).
• Broadcom’s revenue mix has improved due to its growing software business, which tends to be more profitable and less cyclical than semiconductors.

VMware Acquisition

• The acquisition of VMware enhances Broadcom’s position in the software business, which is expected to grow at a rapid pace.
• VMware’s partnerships with major cloud providers like Amazon, Google, Microsoft, and Oracle give Broadcom a competitive edge.

Strong Position in AI

• Broadcom is well-positioned in the AI revolution, with products that support high-quality interconnectivity between advanced AI chips.
• The company’s AI semiconductors are projected to account for 35% of the segment’s total revenue, reaching $10 billion.

Valuation Analysis

• AVGO appears undervalued compared to peers like AMD and NVDA, with a forward price-to-earnings (P/E) ratio suggesting a 17% discount.
• A discounted cash flow (DCF) model estimates AVGO’s target price to be over $1,500.

Risks

• Broadcom’s exposure to the Chinese market (around $11.5 billion in FY2023) poses risks due to potential geopolitical tensions between the US and China.
• Recent scrutiny from EU regulators regarding the VMware acquisition could impact Broadcom’s ability to realize planned synergies.

Conclusion

Broadcom is a key player in the global AI transformation, with a strong presence in both hardware and software. Its attractive valuation and strategic positioning in AI and software make it a compelling investment opportunity. Investors should monitor potential regulatory and geopolitical risks, but the overall outlook for Broadcom remains positive.