Broadcom (NASDAQ: AVGO) has established itself as a significant player in the artificial intelligence (AI) sector, second only to Nvidia in benefiting from the AI infrastructure boom. However, following its recent fiscal third-quarter earnings report, the stock experienced a notable sell-off, down 17.5% from its all-time high. While the company’s revenue and earnings per share exceeded expectations, its guidance fell short of high analyst forecasts. This raises the question: Is Broadcom a buy-the-dip opportunity?
Solid Recent Performance with Mixed Guidance
In its fiscal third quarter, Broadcom reported a 47% increase in revenue, significantly boosted by its acquisition of VMware, which contributed $69 billion to the company’s results. Excluding VMware, Broadcom’s revenue growth was a modest 4%, although it still exceeded analysts’ expectations. For the fourth quarter, Broadcom projects around $14 billion in revenue, reflecting a 7.1% sequential increase, which corresponds to an impressive 30% annualized growth rate.
Guidance Disappointment Despite Strong Growth
Despite these positive figures, guidance fell short of the high expectations driven by Broadcom’s AI sector exposure. The company noted that its AI business saw significant growth, with its custom ASIC business growing 3.5 times year-over-year, and its ethernet switching chips and optical lasers growing four and three times, respectively. However, the expected 10% quarter-over-quarter growth in AI revenue to $3.5 billion represents a deceleration compared to the extraordinary growth seen over the past year.
The Bull Case for Broadcom
While Broadcom’s guidance might have disappointed some analysts, there are several reasons to consider the stock a buy on the dip:
AI and VMware Integration
Broadcom’s AI and VMware segments are becoming increasingly significant. AI semiconductor revenue is nearing $3.5 billion, approaching half of Broadcom’s total semiconductor revenue. VMware, which contributed $3.8 billion in revenue last quarter, now accounts for 66% of Broadcom’s software revenue. This substantial integration of high-growth areas could drive long-term growth.
Growth Prospects
Despite some weakness in non-AI and non-VMware sectors, Broadcom’s AI and VMware segments are expected to continue expanding. VMware’s revenue growth from $2.1 billion to $3.8 billion in three quarters demonstrates strong momentum. Broadcom anticipates VMware revenue of around $4 billion in Q4, and combined with AI revenue, these segments could constitute about $7.5 billion of Broadcom’s total revenue in Q4.
Potential for Recovery
Management believes that non-AI markets are near their bottom and could see recovery in the coming year. If these other segments rebound, they could contribute to overall revenue growth, potentially reaching a 20%-plus growth rate.
Valuation and Analyst Optimism
Currently trading at $140, Broadcom’s valuation is relatively attractive, especially compared to its peers in the AI space. The most bullish analyst, Hans Mosesmann from Rosenblatt Securities, has set a price target of $240, indicating a 71% upside from the current level. This optimistic outlook is based on expectations of continued AI growth and broad industry connectivity standards.
Dividend Yield
Broadcom offers a modest dividend yield of 1.55%, which, combined with its growth potential, makes it an appealing option for investors seeking both capital appreciation and income.
Conclusion
Broadcom’s recent stock price drop presents a potential buying opportunity for long-term investors, particularly those who believe in the continued growth of AI. The company’s strong performance in AI and VMware, coupled with an attractive valuation and positive long-term prospects, supports the case for investing in Broadcom despite short-term disappointments. For those willing to weather the volatility and hold for future growth, Broadcom could offer substantial upside potential in the coming years.
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