Broadcom: Raising Valuation Estimate as AI Becomes a Greater Driver of Growth

• Morningstar Rating: 3 stars
• Fair Value Estimate: $1,350.00
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Broadcom Stock Update

We raised our fair value estimate for wide-moat Broadcom AVGO to $1,350 per share, from $1,090, as we raise our long-term growth assumptions to factor in a greater generative artificial intelligence opportunity for the firm. We continue to view Broadcom as a diversified investment with both semiconductor and software exposure. Within semiconductors, we increasingly view AI as a driver of growth and forecast it to approach half of overall chip sales over the next five years. We retain our positive views of the firm’s other chip businesses, and its software portfolio, inclusive of VMware. We believe Broadcom’s ability to manage various differentiated businesses and generate tremendous profitability from each underpins a wide economic moat. We like its diversified growth opportunity, but view AI as the fastest grower over our medium-term forecast. While we’ve previously been bearish on Broadcom’s valuation, we now see the shares as fairly valued. Investors eager to play into AI may see an opportunity here, though we continue to see AI as a minority of total firm sales against other chip and software businesses.

Broadcom’s AI opportunity is broad and spans networking and computing. We believe its strongest opportunity is in its custom accelerator business, with wins at hyperscale cloud vendors like Google GOOGL and Meta META. We believe its merchant switch and routing chip opportunity in AI is also strong and that Broadcom dominates these markets at the highest speeds required for building generative AI models. We believe the firm’s generative AI opportunity is roughly 70% in custom accelerators and 30% in merchant networking chips, and we expect this split to continue into the medium term. Furthermore, we believe networking is a critical necessity to connect GPUs and accelerators for generative AI models and see Broadcom as well positioned to reap a meaningful share of AI investment over the next five years.