Why Broadcom's stock just got its most upbeat endorsement yet

By Emily Bary

BofA sees plenty of reasons to like Broadcom's stock, including its management team, growth profile and free-cash-flow yield

There are many reasons to keep liking Broadcom Inc.'s stock, according to an analyst who just became Wall Street's most bullish.

BofA Global Research analyst Vivek Arya upped his price objective on Broadcom shares (AVGO) to $2,150 from $2,000 in a Monday report. While his target isn't listed on FactSet, it's higher than all those there, and it implies almost 30% upside from Friday's close.

Arya notes that Broadcom has flipped to a growth stock from a value stock, partly fueled by artificial intelligence.

"In our view, [Broadcom's] diverse growth drivers, highly regarded management team, and unique track record of capital appreciation, dividend growth and [above-market dividend] yield can justify a premium multiple," he wrote.

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What's more, Broadcom shares have "low relative ownership," Arya said. While Broadcom ranks among the largest 10 companies in the S&P 500, its ownership among institutions is "well below market weight," according to BofA strategists.

Arya also likes Broadcom's free-cash-flow profile. The company's trailing FCF margin of 43% is the second-highest in the semiconductor sector - behind Nvidia Corp.'s (NVDA), he noted. At the same time, Broadcom "leads semis in [its] combo of 15% annual dividend growth and above-market 1.25% indicated dividend yield."

Broadcom boasts a compelling revenue-growth profile as well, Arya said. The company's core semiconductor and software businesses usually would grow between 5% and 10%, but they could see a 13% compound annual growth rate from fiscal 2024 to 2026, according to his projections.

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AI silicon and the VMware business could come to make up more than half of the company's sales, Arya added.

While Arya's base-case model sees the potential for $69 in pro-forma earnings per share during fiscal 2026, he noted that faster sales growth and better-than-expected margins on earnings before interest, taxes, depreciation and amortization (Ebitda) could carry the company's earnings power above $80 a share.

Despite Arya's upbeat view, Broadcom shares are down for the fourth trading day in a row. They've declined more than 11% over the current four-session stretch.

Read: Nvidia's stock set to enter correction territory as chip-sector selloff sustains

-Emily Bary

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06-24-24 1145ET

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