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Monday, Jul 22, 2024

Broadcom Stock Surges On Demand for AI Chips

Investor fascination with artificial intelligence is rubbing off on Broadcom Corp., which traces much of its roots to Orange County.

While Nvidia has become the most famous beneficiary of AI, Wall Street is also bullish about the emerging technology’s potential for Broadcom, Orange County’s largest chipmaker with 1,300 employees.

“Broadcom continues to remain one/two steps ahead of competitors” in AI semiconductors, J.P. Morgan analyst Harlan Sur wrote in a recent note to investors.

The chipmaker’s shares have almost doubled in the past year to $1,852.62 and topped an $800 billion market cap for a few days in June. At press time, the stock closed at $1,658 each and a $753 billion market cap. Broadcom in December became one of the 10 most valuable public companies in the U.S. after it completed its $69 billion takeover of VMware the month before.

The highest ever market cap for an Orange County-based company was Rivian Automotive Inc. (Nasdaq: RIVN) when it topped $127 billion for a few days after its initial public offering in 2021. Currently the most valuable publicly traded company in Orange County is Chipotle Mexican Grill Inc., which sports a $90 billion market cap (NYSE: CMG).

Broadcom’s stock rise marks another windfall for Chairman Henry Samueli, who counted a 1.9% stake as of April that’s now worth more than $14 billion. Samueli, along with Henry Nicholas, co-founded the firm in 1991 in Irvine before selling it to Avago Technologies in 2016 for $37 billion. At that time, Avago had a $36 billion market cap. The company kept the Broadcom name and moved its headquarters to San Jose and then to Palo Alto (Nasdaq: AVGO).

Samueli also owns the Anaheim Ducks, worth about $925 million, and is developing the OCVibe, a $4 billion project in Anaheim.

Blowout Q2

Broadcom reported fiscal second-quarter revenue for the period ended jumped 43% to $12.5 billion. Its adjusted profit climbed 31% to $7.4 billion; the adjusted profit was 59% of revenue.

Revenue from AI products was a record $3.1 billion during the quarter.

“Broadcom’s second-quarter results were once again driven by AI demand and VMware,” Chief Executive Hock Tan said in a June 12 statement. “Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds.”

Things are going so well that in March, Broadcom paid a cash dividend totaling $2.4 billion. Afterward, the company reported it still had $9.8 billion in cash as of May 5.

Broadcom is proposing a 10-for-1 forward stock split, scheduled for July 15.

The company makes chips for hundreds of uses, including automotive, appliances, Wi-Fi and data centers.

It’s the No. 1 market share leader in the market for high-end application specific integrated chip, commonly known as ASIC, Sur said. These chips are designed for specific workloads of clients to be more efficient for both cost and energy usage. J.P. Morgan’s Sur added that this market should grow at 20% annually to $25 billion to $30 billion, driven by the “aggressive adoption of generative AI.”

“We believe Broadcom has captured a new design win for AI accelerator custom chip programs with Google,” Sur wrote. “In Datacenter/AI Ethernet switching/routing chipsets, Broadcom continues to maintain its #1 market share.”

Besides Google, other customers are believed to include the who’s who of technology: Facebook parent Meta, Amazon and Oracle.

J.P. Morgan also set a stock price target of $2,000 apiece by the end of the year or 20% above the closing price on June 21.

Besides Broadcom, fellow chip maker Marvell of Santa Clara will also continue to dominate the high end of the custom chips market, J.P. Morgan predicted.

Revenue Laggard?

Excluding its VMWare acquisition, second-quarter revenue for Broadcom rose only 12%, which caused some analysts to be skeptical. They point out that Broadcom’s revenue growth is expected to be 17% annually during the next five years.

By contrast, analysts expect Nvidia to grow 43% annually in the next five years, including 98% to $113 billion in fiscal 2025, followed by 33% growth in fiscal 2026.

Skeptics point out that Broadcom has more than $70 billion in long-term debt.

However, the number of analyst strong buy recommendations has grown from seven in May to 10 in June while the number of holds, a Wall Street euphemism for sell, has fallen from six to two.

TV stock pick guru Jim Cramer is on board the Broadcom bandwagon.

When a caller recently asked Cramer about semiconductor-based connectivity solutions company Astera Labs, he instead recommended Broadcom, saying Astera Labs is a “good stock, not a great story.”

“I’d rather have you stick with something like Broadcom, which is still cheap even after this remarkable run,” Cramer said.

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