In the financial realm, the year 2023 was heralded as the dawn of artificial intelligence (AI) stocks. However, 2024 has proven to be an unexpected delight, with AI stocks transitioning from hot to scorching. Leading the pack are industry titans like Nvidia (NASDAQ: NVDA) and Super Micro Computer, demonstrating stellar performance in the AI sector. Noteworthy advancements have been made by companies like Arm Holdings, Taiwan Semiconductor, ACM Research, and most recently, Dell Technologies, with each experiencing significant stock jumps following their earnings reports.
On the upcoming Thursday, Broadcom (NASDAQ: AVGO) is slated to join the AI stock race by unveiling its earnings post-market closure. The diversified semiconductor firm has already marked a 21% increase this year, a testament to its successful navigation through the rising AI surge.
Will Broadcom follow the AI stock trend and soar after its earnings release on Friday? Let’s delve deeper into this intriguing subject.
Image source: Getty Images.
Examining Broadcom’s Role in AI
With a market cap exceeding $600 billion, Broadcom has frequently been cited by Wall Street analysts as the second-largest winner in the AI chip sector, following in Nvidia’s footsteps. However, Broadcom’s contribution to artificial intelligence diverges from Nvidia’s stronghold on GPUs (graphics processing units) and accelerators used in data centers for running massive AI models.
Unlike its counterparts, Broadcom shines in the networking chip domain that facilitates the seamless interaction of AI components. Notably, the company unveiled its Jericho3-AI fabric last April, tailored to offer high-performance connectivity for a 32,000 GPU cluster. CEO Hock Tan underscored the surge in demand for “network connectivity for AI by hyperscalers” as a driving force behind the firm’s growth in the preceding fiscal year.
During the recent earnings call, management disclosed that generative AI revenue accounted for $1.5 billion in the company’s latest quarter, making up 20% of its semiconductor revenue and 16% of its total revenue. With a promising outlook, the company anticipates robust networking growth in fiscal 2024, projecting a 30% upsurge commencing in November, driven partially by the expansion of AI accelerators within cloud infrastructure services.
Despite witnessing a modest 4% revenue incline to $9.3 billion in the fourth quarter, Broadcom is facing industry cycle headwinds in certain end markets like telecoms. Nevertheless, investors have showcased that transformative revenue growth is not a prerequisite for reaping the benefits of the AI surge. Dell Technologies, for instance, witnessed a remarkable 32% stock surge post its earnings report last Friday, despite reporting an 11% Q4 revenue decline. The escalating demand for AI servers triggered this upward trajectory. Similarly, Arm’s shares experienced a surge following its February earnings report, even as revenue climbed a moderate 14%. Elevated guidance from AI-centric operations indicated the company’s adeptness in capitalizing on the AI boom, propelling its shares upwards significantly.
Assessment of Broadcom Stock
Anticipating the fiscal Q1 earnings report, analysts have relatively subdued expectations for Broadcom’s results, considering the recent acquisition of VMware. Projections entail revenue of $11.72 billion, reflecting a 31% year-over-year surge, despite a slight dip in earnings per share from $10.33 to $10.29, partially attributed to the integration of VMware.
If contemplating investing in Broadcom ahead of the earnings disclosure, adopting a long-term perspective is recommended. Predicting earnings movements accurately is an arduous task, even for the most seasoned investors.
For long-term investors, Broadcom emerges as an appealing choice for various reasons. The company boasts a long-standing history of outperforming the market. CEO Hock Tan is esteemed for his efficient operational strategies, poised to extract higher profits from VMware. Positioned favorably to leverage the AI market growth, Broadcom, despite its diversified portfolio that impedes witnessing Nvidia’s soaring growth, trades at a reasonable valuation.
Regarding the stock’s potential reaction to the earnings unveiling on Friday, previous trends in the AI stock domain offer an optimistic outlook for Broadcom. The possibility of the company revising its guidance on AI-based growth, aligning with trends observed among its peers, is plausible. Notably, options traders are betting on Broadcom to exhibit positive movement on Friday, indicating favorable odds. However, the likelihood of a substantial surge similar to Dell and Arm remains less probable due to Broadcom’s expansive size, diversification across non-AI-centric businesses, and investor focus on the VMware acquisition.
Irrespective of the extent of a potential upswing, the company’s long-term promise in the AI domain and beyond appears robust, upheld by its track record of execution excellence and networking solutions prowess.
Should you invest $1,000 in Broadcom right now?
Prior to investing in Broadcom, it is prudent to consider the following:
The Motley Fool Stock Advisor analyst team recently pinpointed the 10 best stocks for investors to explore… and Broadcom did not make the cut. The 10 featured stocks hold immense potential for generating substantial returns in the forthcoming years.
Stock Advisor furnishes investors with a comprehensive roadmap for success, offering guidance on portfolio construction, regular analyst updates, and two new stock picks monthly. Since 2002*, the Stock Advisor service has surpassed the S&P 500 return by more than threefold.
*Stock Advisor returns as of February 26, 2024
Jeremy Bowman has positions in ACM Research and Broadcom. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Super Micro Computer and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
