After Earnings, Is Broadcom Stock a Buy, a Sell, or Fairly Valued?

Broadcom AVGO released its fiscal first-quarter earnings report on March 6. Here’s Morningstar’s take on Broadcom’s earnings and stock.

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $200.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Broadcom’s Earnings

Broadcom’s fiscal first quarter beat management guidance. Revenue rose 25% year over year and 6% sequentially to $14.9 billion, with artificial intelligence revenue rising roughly 15% sequentially to $4.1 billion. Guidance implies flat sequential revenue, with 7% sequential growth in AI revenue.

Why it matters: AI chip sales and VMware continue to overwhelmingly drive Broadcom’s results, and AI revenue and guidance once again surpassed our expectations. AI revenue is now more than a fourth of total revenue and roughly half of chip revenue. VMware is more than a fourth of revenue.

• Broadcom announced two new AI accelerator customers, on top of its five already at different stages of development. Management reiterated a $60 billion-$90 billion serviceable addressable market for its three first customers in 2027, of which we expect it to capture roughly 70% share.
• Broadcom’s non-AI chip markets remain cyclically soft, and we have pushed out our rebound expectations. Still, these markets are a diminishing minority driver of results, and these cyclical downturns don’t materially affect our valuation.

The bottom line: We raise our fair value estimate for wide-moat Broadcom to $200 per share from $190 behind a higher AI chip revenue forecast. We also raise our Morningstar Uncertainty Rating to High, stemming from the increasing concentration of AI as a driver of results.

• Shares rose about 15% after hours, due to higher AI guidance and optimistic accelerator customer commentary. We now see shares as fairly valued.
• We are conservative on the midpoint of management’s SAM, given uncertainty regarding the cadence of chip customer spending. We model toward the lower end of the SAM but have raised our forecast for 2027 AI revenue, now implying roughly 55% growth over the next three years.

Fair Value Estimate for Broadcom

With its 3-star rating, we believe Broadcom’s stock is fairly valued compared with our long-term fair value estimate of $200 per share. Our valuation implies a fiscal 2025 adjusted price/ earnings multiple of 31 times and a fiscal 2025 enterprise value/sales multiple of 16 times.

In our view, Broadcom’s primary valuation drivers are the growth of its AI chip business and its ability to extract growth and operating leverage from VMware. We also anticipate continued inorganic growth over the long term. We model 19% revenue growth for Broadcom through fiscal 2029. We see high artificial intelligence sales driving supernormal growth in the next five years, but for longer-term durable growth to settle around 10% on an organic basis.

Read more about Broadcom’s fair value estimate.

Economic Moat Rating

We believe Broadcom holds a wide moat, stemming from intangible assets in chip design and switching costs for its software products. Broadcom’s strength in both chips and software allows it to earn terrific accounting and economic profits, and we believe its competitive positioning will let it do so for the next 20 years. While we see most of Broadcom’s businesses as moaty in isolation, we believe its ability to aggregate disparate businesses via acquisitions and run them with terrific efficiency reinforces its wide moat, evidenced in starkly impressive operating and economic profit margins.

Read more about Broadcom’s economic moat.

Financial Strength

We anticipate Broadcom will focus on strong cash generation. Over the short term, we expect the firm to focus on paying down debt taken out to acquire VMware. Over the long term we expect the focus to be on growing its dividend and bolting on more acquisitions by which to add to its cash flow.

As of October 2024, Broadcom held $9 billion in cash and equivalents versus $68 billion in gross debt, with approximately half of that taken on to finance the 2023 acquisition of VMware. We don’t worry about its debt load, given the long-dated nature of its outstanding notes and the firm’s robust cash generation.

Read more about Broadcom’s financial strength.

Risk and Uncertainty

We assign a High Uncertainty Rating to Broadcom. As a chipmaker, it is vulnerable to market supply and demand cycles. Though it has been able to offset cyclicality in recent years with its software exposure and networking strength as a buoy, future cycles may not look similar. It’s also highly reliant on Taiwan Semiconductor Manufacturing TSM for its chip supply, and supply constraints could hamper its ability to ship to customers in the future.

We also see risk arising from customer concentration and AI. Broadcom is increasingly reliant on its AI accelerator business, which has a handful of high-spending customers. Changes in spending patterns from these customers and overall AI demand can create fluctuations in results and affect market sentiment on its stock.

Read more about Broadcom’s risk and uncertainty.

AVGO Bulls Say

• Broadcom is a poster child for operating efficiency. It earns excellent operating margins and generates enormous cash flow. It is particularly strong at acquiring companies and trimming excess expenses.
• Broadcom’s networking and wireless chip businesses boast best-of-breed technologies.
• We believe Broadcom will be a significant beneficiary of rising AI spending, which we expect to spur significant growth for its networking semiconductor sales.

AVGO Bears Say

• Broadcom’s chip business is prone to cyclicality and customer concentration, with a small handful of wireless and AI customers becoming a rising portion of revenue.
• Broadcom’s software portfolio holds legacy and mature businesses, like virtualization and mainframes, which we think will exhibit moderating growth.
• Broadcom relies heavily on acquisitions to expand its portfolio, and may struggle to find deals large enough to move the needle that can pass antitrust scrutiny

This article was compiled by Aman Dagra.