Broadcom report is tech bulls’ next hope to turn AI trade around

As skepticism about the artificial intelligence (AI) trade mounts on Wall Street, bulls are looking to results from chipmaker Broadcom Inc. for a reset.

The company is due to report after the close, and if it confirms that AI demand is still strong, it may help soothe investors’ nerves. Nvidia Corp.’s results last week failed to live up to lofty expectations, sparking a selloff for AI-exposed stocks, while worries about when companies’ spending on the new technology will start to pay off have been a theme of the whole earnings season.

“Broadcom is well positioned to ride to the market’s rescue,” said Chris Barto, senior investment analyst at Fort Pitt Capital Group, noting that the firm is well run and diversified while trading at a lower valuation than most AI-exposed stocks.

“It never got the hype that companies like Nvidia did, but I think its results this quarter will bolster the view that AI isn’t going to be a short-term spending spree.”

Shares of Broadcom fell 2 per cent on Sept 5.

Broadcom, which is a supplier to Apple Inc. and other big tech companies, cemented its status as a major beneficiary of AI spending last quarter, when revenue from AI products reached a record US$3.1 billion – making up about a quarter of total sales.

For fiscal 2024, chief executive Hock Tan predicted AI-related sales of more than US$11 billion – a forecast that analysts at Citigroup expect to be raised today. Total revenue for the year is expected to soar 44 per cent to around US$52 billion, according to data compiled by Bloomberg. That would beat the overall chip sector, which Bloomberg Intelligence predicts will see sales growth of about 26 per cent.

“The first generation of AI spending was on processing ability, chips and servers, but the next wave will be in connecting the data centers, and that’s where Broadcom fits in,” said Aash Shah, senior portfolio manager at Summit Global Investments. “That kind of capex is really in its early innings, and it is definitely underappreciated how much of it Broadcom is poised to capture.” Shah said Broadcom is one of his favorite stocks.

The AI tailwind has supported the shares this year – they’re up 36 per cent even after a volatile few months, making Broadcom one of the top performers on the Philadelphia Stock Exchange Semiconductor Index, which is up 13 per cent. The options market is implying a move of 6.7 per cent in either direction for Broadcom stock following the report.

Despite this year’s gain, the shares are still cheaper than other AI plays including Nvidia, Advanced Micro Devices Inc. and Arm Holdings Plc., trading at less than 26 times estimated earnings.

“Relative to the more pure-play AI names, Broadcom behaves a bit defensively,” said Melissa Otto, head of TMT research at S&P Global Visible Alpha. “It trades at a lower valuation and has more diversified businesses, although it is also hooked into this fantastic AI theme that is seeing a lot of growth.”

That growth potential, coupled with a less-demanding multiple, is why Broadcom is so well liked on Wall Street, with nearly 90 per cent of analysts tracked by Bloomberg recommending to buy the stock. The average price target implies gains of more than 25 per cent over the next twelve months.

“It may not offer the upside you see elsewhere, but it doesn’t carry the downside risk either,” Otto said. “It’s an AI play for those who don’t want a wild one.” BLOOMBERG