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Wall Street showers an AI chipmaker we own with praise — and it’s not Nvidia

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6 months ago

June 7, 2024

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Wall Street showers an AI chipmaker we own with praise — and it’s not Nvidia

There’s no shortage of affection for Club holding Nvidia on Wall Street. But Broadcom , our other artificial intelligence chipmaker, has received its fair share of love in recent days, with analysts wisely making the case that there’s more upside to be had for the stock. Broadcom’s fast-growing AI exposure featured prominently in optimistic research sent to clients this week by analysts at Melius, Bernstein and JPMorgan. Broadcom sells both networking products that stitch together parts of the data centers where AI computing occurs and helps tech giants, like Club name Alphabet , design custom AI processors. JPMorgan upped its growth forecast for the custom AI chip market and said Broadcom’s dominance in the space is poised to continue. Also this week, Bernstein chip analysts sent a presentation to clients that outlined why Broadcom is one of their best ideas, citing its AI opportunity and attractive valuation, among other reasons. The party kicked off Monday, when Melius initiated coverage of Broadcom with a price target that implied around 40% upside, labeling it “one of the must-own AI stocks.” The Club agrees, which is why we added Broadcom to the portfolio in late August — some nine months ago. The attractiveness of its networking and custom chip operations has only strengthened since then, as the pace of investment in AI has remained fervent. Even though the stock has climbed around 60% since our initiation, its best days are ahead. Our current price target is $1,550 per share, with a 2 rating , meaning we’d be buyers on a pullback. About 78% of the Wall Street analysts covering Broadcom have a buy-equivalent rating on the stock, with an average price target of roughly $1,563, according to FactSet, representing more than 11% upside to Thursday’s close. AVGO YTD mountain Broadcom’s year-to-date stock performance. The latest upbeat batch of Wall Street commentary comes ahead of Broadcom’s fiscal 2024 second-quarter results after Wednesday’s market close. Investors will be intently focused on the growth of the company’s AI semiconductor revenue. Back in March, the company reported that line item quadrupled to $2.3 billion in its first quarter. At the time, management also hiked its full-year outlook for the business, saying it was poised to be roughly 35% of semiconductor revenue, or more than $10 billion. Previously, Broadcom forecasted it to be around 25% of chip sales. Broadcom is a sprawling enterprise, with an increasingly sizable software business – thanks in large part to last year’s VMWare acquisition – that complements its traditional hardware business. Significant parts of that hardware business, namely the parts serving legacy markets like broadband and wireless, have been under pressure in recent quarters. The growth of its AI revenues has allowed investors to look past the legacy struggles, with hopes that those lagging areas will eventually return to growth. AI operations at Broadcom fall into two main buckets. The first is networking, which covers a portfolio of products including Ethernet switches and adapters used in data centers to connect tons of high-performance servers together ensuring smooth and efficient data communication. Essentially, these networking chips help make up the plumbing of data centers. Large cloud-computing providers and companies that operate their own data centers are key customers of these networking products. The second line of Broadcom’s AI business is custom processors, where the company is best-known for co-designing Alphabet’s tensor processing units, or TPUs. Google-parent Alphabet and Broadcom have collaborated on the creation of the AI chips for years, with the sixth-generation TPU being announced last month . Broadcom recently won the contract to co-design the seventh iteration of the chip, which is targeted for production in 2026, JPMorgan told clients in this week’s note. More and more tech giants are looking to design in-house chips, and portfolio holding Meta Platforms is believed to be another customer of Broadcom’s custom silicon business, according to JPMorgan. Amazon and Microsoft also have custom chips, though both of those Club names are thought to utilize Marvell Technology ‘s co-design services, according to the JPMorgan analysts. JPMorgan recently raised its outlook for the custom chip market to between $20 billion and $30 billion, with the high end of the range increased by $5 billion. The analysts see it growing at a 20% compound annual growth rate, or CAGR. Currently, Broadcom has an estimated 55% to 60% market share, with Marvell at roughly 13% to 15%, according to JPMorgan. While Alphabet, Amazon, Meta, and Club name Microsoft remain big buyers of so-called merchant silicon – these are processors from the likes of Nvidia and Advanced Micro Devices – custom AI chips are becoming an increasingly important part of their computing strategies, too. Such chips can be cheaper and designed to do certain tasks well. The AI chips made by market leader Nvidia and rival AMD are more general purpose. Put the networking and custom silicon pieces together, and there’s a lot to like about Broadcom’s standing in the field of AI tech stocks. We recognize Broadcom’s networking operations compete against Nvidia’s own business and the chips it helps tech giants develop also represent competition for the Jensen Huang-led firm. But given the size of the AI market, there is room for both as analysts at Melius argued this week. “Nvidia should be AVGO’s biggest rival in accelerators and networking … but we believe both can win,” the Melius analysts wrote. We share that view — and intend to stay invested accordingly. (Jim Cramer’s Charitable Trust is long NVDA, AVGO, MSFT, AMZN, GOOGL and META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Hock Tan, CEO of Broadcom

Lucas Jackson | Reuters

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