Broadcom shares slumped lower in early Friday trading after the networking-chip maker posted a mixed set of quarter earnings and a muted near-term revenue forecast that added to concerns that the AI investment theme could be slowing into the final months of the year.
Broadcom (AVGO) , one of the market’s star performers so far this year, has seen a huge surge in demand for its specialized networking chips that has helped the group add more than $200 billion in value so far this year.
The chips play a key role in the development of AI systems, where large data models require a series of networks, connected by nodes, that determine the speed at which the collection of information in one network is passed along to the next.
The group also makes what are known as ASIC chips, which help hyperscalers move large amounts of data through integrated circuits and ultimately accelerate the speed and reliability with which they process information.
The group’s role in the AI investment theme, as well as the muted earnings and outlook published last month by market-leading chipmaker Nvidia, put its fiscal third quarter earnings in sharp focus as investors looked to justify the broader sector’s lofty valuations.
Broadcom was able to post a modestly better-than-expected revenue tally for the three months ending in July of $13.1 billion, thanks in part to a surge in demand for its ASIC and AI-focused chips, but failed to impress investors with its near-term outlook.
Broadcom CEO Hock Tan says the AI investment theme is heading for another “upcycle that could even meet or even surpass what our previous up cycles” have been.
AI revenues were essentially flat from the previous quarter at $3.2 billion, but are likely to grow 10% in the current quarter thanks in part to continued demand from hyerscalers such as Meta Platforms (META) , Google parent Alphabet (GOOGL) and China-based TikTok owner ByteDance.
Improving AI growth forecasts
Broadcom said it sees current quarter sales in the region of $14 billion, just shy of forecasts, with a full-year tally of around $51.5 billion, just ahead of its prior forecast of $51 billion.
Revenues from VMware, the cloud software group it purchased for $61 billion in 2022 and closed last year, is expected to reach a quarterly run rate of $4 billion.
“While the company’s report was solid, without any material soft points, its AI business lacked the clear upside momentum the Street was looking for,” said Benchmark analyst Cody Acree, who reiterated his ‘buy’ rating and $210 price target following last night’s earnings report.
“Still, the company’s results showed steady progress in its AI business (and) overall, we thought Broadcom delivered a solid report and outlook, with many points of fundamental strength for investors to be encouraged by,” he added.
Morgan Stanley analyst Joseph Moore said Broadcom’s AI growth, while not linear, remains strong, adding that the group’s current forecast suggests flat growth for it AI products division.
Still, the analyst added $4 to his Broadcom price target, taking it to $180 per share and kept his ‘overweight’ rating in place following last night’s earnings report.
“We assumed that there was conservatism in that, and had a $12 billion estimate, but we highlighted in our preview that the company had characterized the ASIC business as lumpy from quarter to quarter,” said Moore,
“That lumpiness did play out, as the company saw AI processors flattish q/q – with networking for AI up slightly,” he added. “But importantly, growth is still close to 3x this year, and sequential growth resumes in October.”
Solid hyperscaler demand
Canto Fitzgerald analyst CJ Muse, who reiterated his $200 price target and ‘overweight’ rating on Broadcom, said the AI revenue story remains compelling and that the stock remains “one of the highest quality AI plays in the market.”
“AI revenues continue to grow strongly and with customer breadth improving in custom chips (from Google to now Meta Platforms and Bytedance accelerating) coupled with Ethernet Networking growth tied very tightly with forward GPU sales, fiscal year 2025 should be another strong year for AI,” he added.
Goldman Sachs analyst Toshiya Hari was also bullish on the group’s longer-term outlook, calling the third quarter numbers and current quarter forecast a “hiccup”.
Hari, who lifted his price target on Broadcom by $5, taking it to $190 per share , citied the group’s “consistent” cash flow generation and its “robust” competitive position in the high-speed networking space.
JPMorgan analyst Harlan Sur also boosted his Broadcom price target, taking it $10 higher to $210 per share while keeping an ‘overweight’ rating in place.
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“AI permeates enterprises all across and digital natives, you need to upgrade servers,’ Broadcom CEO Hock Tan told analysts on a conference call late Thursday. “You need to upgrade storage. You need to upgrade networking, connectivity across the entire ecosystem.”
“If anything else, we could be headed for upcycle, timing of precisely when we’re not sure, but an upcycle that could even meet or even surpass what our previous up cycles would be, simply because the amount of bandwidth you need, the amount to manage, store, manage all these workloads that come out of AI would just the need to refresh and upgrade hardware,” Tan added.
Broadcom shares were marked 7.9% lower in premarket trading to indicate an opening bell price of $140.75 each, a move that would trim the stock’s six-month gain to around 4.3%.
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