Everything appears to be falling into place nicely for Broadcom (NASDAQ:AVGO) stock. The chip giant’s unique position as the ASIC (application-specific integrated circuit) provider for tech luminaries such as Google and Meta has given it a prominent seat at the AI table. And investors have benefitted immensely here; the stock has gained almost 120% over the past year, a run that has caught the attention of a new Wall Street supporter.
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Enter Macquarie analyst Arthur Lai, Broadcom’s latest bull. Lai argues that while GPUs have so far dominated the AI chip landscape, the tide is turning. Fueled by adoption among hyperscalers and expanding into industries such as automotive, healthcare, and financial services, the analyst sees “surging demand” propelling ASICs ahead of GPUs in the coming years. Between 2025 and 2028, Lai reckons the global AI ASIC market will grow at a CAGR of 72%. And Broadcom, being “well positioned as the premier growth story in ASIC and infrastructure software,” should capture more than 70% of that market’s share.
In fact, the company already commands a near-monopoly in AI ASICs and cloud networking, maintaining top positions in Ethernet switching, routing, and SerDes IP. Meanwhile, the rising complexity of AI models is pushing system-level bandwidth to grow three- to five-fold per generation, substantially increasing the silicon content in each rack.
Overseeing all of this is a “world-class management” team with a sound operating strategy. Under CEO Hock Tan, the company boasts a “proven track record,” having met synergy targets, expanded margins, and integrated acquisitions such as LSI, CA Technologies, Symantec, and VMware.
The VMware acquisition is a good example. The 2023 purchase significantly increased the company’s software contribution, which now accounts for over 40% of total revenue. Broadcom moved VMware from a perpetual license model to a subscription-based model, resulting in double-digit annual recurring revenue growth and maintaining high renewal rates. And with infrastructure software now accounting for about 50% of EPS, with segment gross margins reaching 93%, the recurring nature of this software revenue supports and “enhances long-term stability and free cash flow.”
That stability extends to shareholder returns. Alongside its AI and software leadership, Broadcom has rewarded investors with one of the strongest dividend growth track records in the sector. Over the past decade, dividends have grown at a ~34% CAGR, with the payout ratio rising from 21% in 2011 to around 64% in 2024. Management has pledged to return roughly half of prior-year free cash flow, keeping the yield comfortably above the industry average.
While some have questioned Broadcom’s increasingly hefty valuation, Lai thinks it is merited. “We believe Broadcom should trade at a premium to industry peers with 1) strong growth outlook, 2) a strong ~34% dividend CAGR in recent years, and 3) long-term strategic planning supported by a unique management incentive plan,” the analyst summed up.
Accordingly, Lai initiated coverage of AVGO stock with an Outperform (i.e., Buy) rating and $420 price target, implying the shares will climb 15% over the coming months.
Most analysts are thinking along similar lines; based on a mix of 27 Buys and 2 Holds, the stock claims a Strong Buy consensus rating. However, given the big gains, the $379.28 average price target factors in one-year returns of a modest ~4%. (See AVGO stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.