Long-Term Play: How AVGO's Focus on Artificial Intelligence Drives Growth

Broadcom Inc. (AVGO), a global tech leader that develops and supplies semiconductor and infrastructure software solutions, exceeded analysts’ expectations for both revenue and earnings in the first quarter of fiscal year 2024. Its revenue and EPS came in at $11.96 billion and $10.99, surpassing the analysts’ estimates of $11.72 billion and $10.42, respectively.

For the quarter that ended February 4, 2024, the company’s net revenue witnessed a 34.2% increase year-over-year. The revenue increase was primarily driven by AVGO’s acquisition of VMware in November 2023, which accelerated growth in its infrastructure software segment. Also, the company saw a high demand for its networking products, particularly in AI data centers and custom AI accelerators from hyperscalers.

AVGO’s first-quarter non-GAAP net income and non-GAAP earnings per common share rose 17.2% and 6.4% from the prior year’s period to $5.25 billion and $10.99, respectively. Furthermore, the company’s adjusted EBITDA grew 26% from the year-ago value to $7.16 billion.

Broadcom’s fiscal 2024 software revenue guidance is set at an impressive $20 billion. Additionally, fueled by the sustained robust demand for AI NAND, the company anticipates networking revenue to exceed 35% year-on-year growth, surpassing its early projection of 30% annual growth.

Moreover, it projects moderate to strong single-digit percentage year-over-year growth in its Semiconductor Solutions division for fiscal 2024. AVGO has reiterated its consolidated revenue target of $50 billion, representing a 40% increase year-over-year. It has also reiterated its adjusted EBITDA forecast of $30 billion for the year, a 60% growth rate.

In addition, Streets expects Broadcom’s revenue and earnings per share for the second quarter of fiscal 2024, ending April 2024, to rise by 37.3% and 4.9% to $11.99 billion and $10.82, respectively.

Several Cutting-Edge Innovations and Breakthroughs

On March 14, 2024, AVGO launched Bailly, the industry's first groundbreaking 51.2 Tbps CPO Ethernet switch. The innovation would allow hyperscalers to establish energy-efficient and cost-effective large-scale AI and computing clusters.

AVGO’s technology leadership and manufacturing innovations will ensure that Bailly delivers 70% better power efficiency and an optical I/O roadmap that aligns with the future bandwidth and power needs of AI infrastructure.

Furthermore, the tech company’s March 13 announcements showcased vital advancements extending its market leadership with an expanded portfolio of optical interconnect solutions for AI and ML applications. The cutting-edge optics support high-speed data transfers in large-scale generative AI compute clusters, connecting front-end and back-end networks.

Key achievements unveiled by Broadcom include the production release of 200-Gbps per lane electro-absorption modulated laser (EML) to pair with next-gen GPUs, the demonstration of the industry’s first 200G/lane vertical-cavity surface-emitting laser (VCSEL), and the shipment of over 20 million channels of 100G/lane high-speed optical components used in AI/ML systems.

Moreover, AVGO showcased the continuous wave (CW) laser with high efficiency and high linearity for silicon photonics (SiPh) modulation at 200G. These breakthroughs will revolutionize high-speed interconnects within AI clusters, facilitating front-end and back-end generative AI compute networks.

“Generative AI has unleashed a network transformation necessitating an order of magnitude increase in high-speed optical links compared to standard network requirements,” said Near Margalit, vice president and general manager of the Optical Systems Division at AVGO. “We will continue to invest in VCSEL, EML and CW laser technologies to deliver disruptive innovation in bandwidth, power and latency for optical interconnects in next generation AI links.”

According to Dr. Vladimir Kozlov, founder and CEO of LightCounting Market Research, Alphabet Inc. (GOOGL) and NVIDIA Corporation (NVDA) will lead the way as the initial adopters of 200G per lane optics for linking GPUs and TPUs in AI clusters, which is currently a highly sought-after segment in the market.

Kozlov added that Broadcom, known for pioneering innovative components, is once again at the forefront by supplying the necessary technology for the next generation of optical transceivers, supporting the rapid evolution of AI infrastructure.

“NVIDIA is at the forefront of photonics innovation, and Broadcom has been an important optical-component partner, matching the pace and scale required as we advance our HPC and AI optical-interconnect technology,” said Craig Thompson, vice president of LinkX products at NVDA. 

At Innolight, we have been deploying leading-edge optical interconnect solutions for AI, ML and HPC applications,” stated Osa Mok, CMO at Innolight Technology. “We are excited to continue our partnership with Broadcom to develop advanced terabit optical modules for generative AI, enabling AI clusters to scale and support the next generation of LLMs.”

Also, Sean Davies, vice president of sales at Eoptolink Technology, said, “We are excited to partner with Broadcom to bring to market state-of-the-art solutions to enable terabit connectivity and drive new generative AI architectures.”

Dividend Growth Trajectory

AVGO recently declared a quarterly dividend of $5.25 per share, payable on March 29, 2024, to shareholders on record as of March 21, 2024. This increase brings the annual dividend to $21 per share. The company has increased its dividends for 13 consecutive years.

Moreover, over the past five years, the company’s dividend payouts have grown at a CAGR of 19.3%. AVGO’s annual dividend translates to a yield of 1.70% at the prevailing stock price.

The company's strong financial performance and success in the AI chips market, along with synergies from a recent merger, suggest ongoing earnings growth, which supports the potential for future dividend increases.

Valuation Concerns

While all seems well, AVGO's substantial surge over the past year has led to a lofty valuation. Its forward P/E ratio stands at 61.45x, 118.2% higher than the industry average of 28.16x. Likewise, the stock’s forward EV/Sales and forward Price/Sales of 12.68x and 11.41x are 337.4% and 295.7% higher than the industry averages of 2.90x and 2.88x, respectively.

Thus, buying shares of AVGO at the moment might not be the best investment decision. However, one could closely monitor this stock as its strong AI business could drive significant growth in the future.

Favorable Analyst Estimates

Citigroup (C) analyst Christopher Danely strongly recommends buying AVGO stock, with a price target of $1,100. The upgrade is based on the company's solid core business performance and the positive impact expected from its VMware acquisition after the release of its fourth quarter and fiscal year 2023 earnings.

AVGO’s impressive financial results, particularly the contributions from AI, played a key role in this decision. Notably, the management has significantly increased its AI spending target from $4 billion in 2023 to more than $8 billion in 2024.

Currently, 86.7% of top-rated analysts rate AVGO as a Strong Buy or Buy, while 13.3% consider it a Hold. None suggest selling the stock. Analysts forecast AVGO’s upcoming year to yield earnings per share of $39.68, marking an 18.5% year-over-year increase if predictions hold true.

Bottom Line

AVGO’s impact on global connectivity is profound. The semiconductor giant supplies chips for virtually all internet-connected devices and is evolving into a software solutions provider for businesses. Broadcom has been primarily benefiting from the robust adoption of AI. The stock has gained more than 45% over the past six months and around 97% over the past year.

During the first quarter of fiscal 2024, the company’s AI revenues under its semiconductor segment quadrupled year-over-year to $2.30 billion. Further, AVGO projects fiscal 2024 AI revenues of nearly $10 billion, higher than the prior guidance of $7.50 billion and account for about 35% of semiconductor revenues, up from previous guidance of 25%.

AVGO recently announced key accomplishments, extending its market leadership with an expanded portfolio of optical interconnect solutions for AI and ML applications. These developments signify significant progress in incorporating state-of-the-art optical technologies into the constantly shifting realm of AI infrastructure.

The collaboration between Broadcom and key industry leaders like NVIDIA, Innolight Technology, and Eoptolink Technology further highlights the cooperative approach toward advancing AI/ML optical transceiver technologies. This joint endeavor seeks to meet the increasing need for larger AI clusters while fostering innovation in generative AI architectures.

Despite its high valuation, the company boasts strong business fundamentals and prospects amid emerging AI capabilities, making it a reliable long-term investment option.