Broadcom Inc (NASDAQ:AVGO, ETR:1YD) reports second-quarter earnings on June 12 with comment from the chipmaker about artificial intelligence and completion from NVIDIA key to how markets react.
Strength from AI demand and the company's 2022 acquisition VMWare are expected to overcome the drag from legacy businesses, analysts at Bank of America reckon.
The investment bank anticipates the company will maintain an unchanged full-year sales outlook of approximately $50 billion.
Broadcom’s AI segment, buoyed by custom chip developments for major clients like Google, Meta, and Bytedance, is projected to exceed $10 billion in the full 2024 fiscal year, contributing over $1 billion in additional revenue.
However, analysts at the bank noted that "increasing noise" about NVIDIA’s ethernet switch ambitions could challenge Broadcom’s market dominance.
"While rising AI tide creates room for both current leader [Broadcom] and others, it's hard to ignore the emerging threat from NVDA's Ethernet switch," the analysts wrote, with Nvidia's Spectrum X brand guided to "several $bn" in sales this year.
Ethernet switching is "prime" Broadcom territory with around 90%-plus share historically but Nvidia's ability to effectively "bundle" its Ethernet switch with its much sought after Blackwell graphics processing unit (GPU) "could raise competitive stakes", the analysts said.
VMWare's potential in the AI sector is deemed underappreciated, the added, with an expected growth of 15-20% in the 2025 fiscal year, which could significantly enhance Broadcom’s earnings per share, potentially reaching $70-$75 per share by the end of next year.
The ongoing transition of VMWare customers to the VCF (VMware Cloud Foundation) platform, integrating compute, storage, and networking, is seen as a critical growth driver.
Bank of America highlighted that Broadcom’s stock sentiment remains measured, having risen 26% year-to-date and 7.5% over the last three months, in line with the SOX index.
The stock's valuation is "compelling", trading at a 30-40% discount compared to large-cap semiconductor peers, driven by its strong free cash flow and significant growth potential in AI and VMWare, with BoA reaffirming its 'buy' rating with a price objective of $1,680.