Investors have recently become more particular about their investments in companies involved in the artificial intelligence (AI) revolution. Broadcom Inc. (^AVGO) experienced this firsthand, as its in-line outlook from late Thursday failed to meet Wall Street's expectations. Despite the stock's impressive 65% year-to-date rally, investors were hoping for even more upside, causing Broadcom's stock to drop by approximately 4% in premarket trading on Friday.
One of the key factors contributing to investors' anticipation was generative AI, a type of AI popularized by OpenAI's ChatGPT. Wells Fargo's Aaron Rakers noted that there is still limited visibility into the AI market beyond 2024, and while Broadcom is meeting current demand, there is a desire for a stronger outlook driven by generative AI. Rakers maintained an equal-weight rating on the stock but increased his price target from $800 to $900.
Similarly, Evercore ISI's Matthew Prisco acknowledged the positive growth prospects for Broadcom in fiscal 2024 but expressed disappointment regarding the company's near-term performance in the AI sector. While demand remains robust, Prisco pointed out that AVGO's Gen AI revenue ramp cadence is being affected by longer fab cycle times, which may have dampened expectations for a more significant near-term AI ramp. Nevertheless, Prisco gave an outperform rating and set a $1,000 price target for Broadcom's stock.
Despite the recent setback, investors continue to closely monitor the AI industry and maintain high standards for companies operating in this space.
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Broadcom Generates Excitement with AI Growth, but Faces Weakness in Other Markets
TD Cowen’s Matthew Ramsay acknowledged that Broadcom had high expectations, but Wall Street may have been disappointed by the smaller-than-expected upside. However, Ramsay was still impressed by Broadcom’s AI-driven growth. He also highlighted weaknesses in other areas of the business.
Broadcom's collaboration with Alphabet Inc.'s GOOGL, +0.21% GOOG, +0.31% Tensor Processing Unit (TPU) as a design partner was mentioned by Ramsay. He believes that the Google TPU will continue to drive growth in the near term due to the interest in training large language models. However, the additional revenue of approximately $500 million from this partnership is not sufficient to counterbalance the mixed trends seen in other markets that are more focused on Enterprise and Telco.
Ramsay has given a market-perform rating for the stock but has increased his target price from $800 to $900.
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Bernstein’s Stacy Rasgon expressed favor for Broadcom shares, despite a report that may be perceived as somewhat disappointing considering the recent excitement surrounding AI. Rasgon highlighted that Broadcom's AI prospects for fiscal year 2024 appear even stronger than last quarter's numbers, with an expected increase of more than 25% of semiconductor revenues. This suggests that consensus expectations may be too conservative. Additionally, Rasgon hinted at the increasing likelihood of the VMware deal closing, which could result in substantial accretion potential (possibly exceeding 20%). However, this potential has not yet been factored into the numbers.
Rasgon has given an outperform rating for the stock and raised his target price from $875 to $1,000.