Broadcom Earnings: AI Sales Growth Accelerates

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $1,550
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Earnings

We raise our fair value estimate for wide-moat Broadcom AVGO to $1,550 per share from $1,350 as we raise our medium-term growth forecast for artificial intelligence revenue. AI chip sales exceeded our expectations, and management raised its full-year guide for AI and total firm revenue. Even so, we see the new fiscal 2024 AI guidance as conservative and model further upside. Broadcom’s impressive AI results lend credence to our long-term thesis for networking to benefit from robust generative AI investment and for Ethernet to take share within generative AI networks. Positively, Broadcom also raised its guidance for VMware cost-cutting in fiscal 2024, which we believe will help short-term margins.

Shares rose more than 10% after-hours, aligning with our valuation raise. We continue to see Broadcom’s valuation as challenging, reflecting even more robust AI sales growth than our bullish expectations. Alongside the earnings release, Broadcom also announced a 10-for-1 stock split.

April-quarter sales rose 43% year over year and 4% sequentially to $12.5 billion, with inorganic contributions from VMware and organic AI sales driving most of the growth. Organically, Broadcom sales rose 12% year over year, almost entirely from AI. AI chip sales of $3.1 billion rose about 35% sequentially, well above our expectations. Broadcom is seeing tremendous growth from its custom AI accelerators and merchant networking chips selling into generative AI infrastructure. Non-AI chip sales declined about 30% year over year, reflecting continued cyclical downturns for non-AI networking chips.

Broadcom raised its fiscal 2024 sales outlook to $51 billion, up from $50 billion, due almost entirely to AI revenue, in our view. Management now expects over $11 billion in AI chip sales in fiscal 2024, up from $10 billion. We see this as conservative, implying flat sequential growth in the next two quarters. We expect Broadcom to beat this figure and model $13 billion in AI revenue this year.

Chasing Nvidia

We continue to see Broadcom as incredibly well-positioned to benefit from rising generative AI investment in the long term. It is the second-largest global accelerator vendor behind Nvidia NVDA in terms of its custom chip business. It positively commented that its merchant networking chips for AI should rise faster than its accelerators this year. Broadcom should see strong medium-term growth for its custom accelerators, with a growing customer base that includes Google GOOG and Meta META. We also believe Ethernet networking will take significant share from Nvidia’s Infiniband in generative AI networks over the next five years, which should greatly benefit Broadcom as the top player in high-speed Ethernet merchant networking chips. Our growth thesis on Broadcom implies that networking revenue for generative AI should rise in line with accelerator spending, a view we believe third-party market forecasts underestimate.