Broadcom (NASDAQ:AVGO), a developer of semiconductor and software products for data centers, networking, and similar applications, has benefited from the rapid expansion of the AI market. This comes even as it has further diversified and strengthened its non-AI offerings in recent months. AI revenue only comprises about a fifth of Broadcom’s total revenue base. But the company has shown its intent to enhance its AI sector—it initiated its AI conference in March—while ensuring not to also divert focus from other areas.
Given this sensible approach to balancing AI and other offerings, and following a positive earnings report for the first quarter, many Wall Street analysts are optimistic about Broadcom’s future performance. I agree with them and am bullish on the stock. Still, I also add that, so long as AI constitutes only a relatively small portion of the company’s revenue, it’s key to watch for the firm’s other business areas as well.
AI Is Booming, But It’s Only a Portion of the Business
The rapid expansion of the AI market has contributed to booming sales of Broadcom’s networking and data center chips in recent months. Sales of these chips represented less than 5% of the company’s Semiconductor revenue prior to 2022. Now, the company forecasts that AI-oriented chips will make up a full 35% of Semiconductor revenue for Fiscal 2024.
There’s no doubt that Broadcom’s role in the AI boom is having a significant and positive impact on its sales in this area. What may be more surprising is that Broadcom’s shares have rallied in the last year despite the fact that AI is only a relatively modest portion of its business.
Expansion Into Infrastructure and Wireless Connectivity
What else could be contributing to the fact that AVGO shares have more than doubled in the last year? The company has strategically expanded its operations in non-AI areas to balance the rapid growth of this new and untested industry.
In November, it acquired cloud computing architecture company VMware for $69 billion. With this single acquisition, Broadcom expanded its Infrastructure Software business to represent about half its total revenue. As Broadcom continues to integrate VMware into its pre-existing infrastructure operations, analysts expect this area of the company’s business to help drive Fiscal 2024 revenue and adjusted EPS growth of 41% and 11%, respectively.
Cloud computing infrastructure is not the only area in which Broadcom is expanding its reach. In May 2023, the firm signed a multi-billion-dollar agreement with Apple (NASDAQ:AAPL) to deliver wireless connectivity components, including 5G radio frequency chips, to the tech behemoth. This deal may provide some comfort to shareholders concerned that Apple’s efforts to develop these chips in-house could significantly reduce its partnership with Broadcom.
Optimistic Forward Guidance
At a time of uncertainty for a portion of the semiconductor industry, when some chipmakers have seen demand for products related to smartphones slow, Broadcom’s most recent earnings report should give stockholders further reason to be optimistic.
In its report for the first fiscal quarter, ended February 4, Broadcom said that it would reiterate its Fiscal 2024 guidance, including revenue of $50 billion and adjusted EBITDA of $30 billion. Per its guidance, Broadcom’s expected revenue growth of 41% for the year would far outpace its 8% revenue improvement for Fiscal 2023. First-quarter revenue is much more in line with the forecast figure, as it climbed by 34% year-over-year to $12 billion.
Still, with the company increasing its AI revenue forecast to $10 billion from $8 billion, it still only expects a fifth of its total revenue for the year to come from this area. This is why it is all the more important that, amid the AI hype, investors do not lose sight of Broadcom’s other business lines, which should deliver the large majority of revenue for the year.
Is AVGO Stock a Buy, According to Analysts?
Shares of AVGO are up 111% in the last year. Still, the average AVGO stock price target comes in at $1,572.68, representing 20.7% upside potential. The stock is has a Strong Buy consensus rating based on 20 Buy ratings, three Holds, and zero Sells.
Conclusion: AI Drives Growth, But Other Areas Are Key, Too
Broadcom has ridden the wave of enthusiasm for AI in the last several quarters, more than doubling its share price in the past year. Much of this growth has been fueled by demand for its AI-oriented chips. But AI still remains just a minority of the company’s overall projected revenue for the year. Therefore, investors would be wise to keep an eye on Broadcom’s infrastructure, wireless networking, and other product sales and business lines for a complete picture of its performance.
