Why we’re raising our price target on Broadcom despite sell-off
Broadcom posted strong quarterly results after the bell on Wednesday, but didn’t provide enough upside to its guidance to move the stock higher. Revenue in the fiscal second quarter of 2026, which ended May 3, was $22.19 billion, a slight miss versus the $22.27 billion consensus forecast, according to estimates compiled by LSEG. On an annual basis, revenue rose 48%. Adjusted earnings per share (EPS) increased 54% to $2.44, beating expectations of $2.40, LSEG data showed. Adjusted EBITDA grew 52% to $15.24 billion in the quarter, beating the FactSet consensus of $15.06 billion. A measure of operating profitability, EBTIDA is short for earnings before interest, taxes, depreciation, and amortization. Why we own it Broadcom is a high-quality semiconductor and software company run by an incredible CEO, Hock Tan. The company is a major beneficiary of AI through its networking and custom chip businesses. It also has a shareholder-friendly capital allocation strategy with its dividends and buybacks. Competitors : Marvell Technology, Advanced Micro Devices , and Nvidia Last buy : Nov. 21, 2024 Initiation date : Aug. 24, 2023 Bottom line Broadcom delivered a solid quarter, with continued momentum in its AI semiconductor business only partially offset by softness in infrastructure software. And while the company provided a positive outlook for the current quarter, the market was looking for even stronger AI revenue, sinking shares in the after-market. Part of this AI stock frenzy has been about explosive earnings reports and ever-expanding total addressable markets, so investors were quick to sell the stock after CEO Hock Tan reiterated expectations of delivering $56 billion of AI semiconductor revenues in fiscal year 2026, and backed his target of at least $100 billion in fiscal year 2027. But we were encouraged to hear that management expects continued AI semiconductor revenue growth in fiscal 2028, driven by several initiatives with its six core customers, including Alphabet , the parent of Google, Anthropic, OpenAI, and Meta Platforms. In April, Broadcom entered into a long-term agreement with Google to develop and supply multiple generations of tensor processing units (TPUs) and AI networking. Also in April, Broadcom struck a deal with Anthropic to supply an additional 5 gigawatt (GW) of next-generation TPU-based compute, beginning in 2027. With OpenAI, Broadcom reiterated it has a contractual commitment to deploy 1.3 GW of compute in 2027 as part of the larger 10 GW by 2029 deal. And with Meta, the company expects to deploy 3 GW of compute capacity through the end of 2028. Helping ease some concerns about how the leading AI frontier labs and soon-to-be-public Anthropic and OpenAI will pay for these chips, Tan announced on the call that it is creating an AI special purpose vehicle (SPV) with Apollo and Blackstone . The two alternative asset managers will provide debt financing to facilitate Broadcom’s chip sales. For Broadcom’s other two unnamed customers, Tan said he expects shipments to begin in late 2026 and accelerate in 2027. The company has received purchase orders totaling $6 billion from those customers. The Broadcom quarterly earnings call usually has investors on the edge of their seats to hear Tan proudly announce that he has added a new AI customer or that he is raising his multiyear AI sales guidance. Without something new, it’s hard for the stock to rally. AVGO 1Y mountain Broadcom 1-year return Many of the deals we mentioned were announced in April, and Broadcom should get some credit from the market. Also, the guidance given may prove conservative in hindsight. The company said on the earnings call that it booked more than $30 billion of AI semiconductor orders in the quarter, well above the $10.8 billion of revenue it recorded. Judging by the current pace and the deals already in the pipeline, the company should easily exceed $100 billion in 2027. However, the market wants management to validate the story rather than leave it to analysts’ models. In this environment, beats and raises are necessary, especially for a stock that has rallied more than 80% over the past year. Another aspect of the call that the market may not have liked was Tan’s acknowledgment that competitors could win some designs in Google’s custom chip and AI program. While the bond between the two companies remains strong, no one wanted to hear Tan admit that Google could diversify some of its sources. In short, the quarter was good but not strong enough to power the stock higher after a big move. The sharp negative reaction to solid results is a good example of why taking some profits ahead of a quarter — as we did Tuesday — can be beneficial. Longer-term, Broadcom’s AI business will continue to shine and outpace the conservative forecast, which is why we’re raising our price target to $480 from $425. However, we will keep a 2 rating on the stock, given the incredible run the AI trade has had lately. Segment commentary In Semiconductor Solutions, the much larger of the two operating segments and the one Wall Street is focused on because it houses its AI business, revenue growth accelerated to 78.5%, from 52.4% a year ago. The reported revenue of $15 billion exceeded expectations of $14.7 billion, according to FactSet. AI semiconductor revenue surged 143% year over year to $10.8 billion, accelerating from 106% growth in the prior period. The result was slightly better than the $10.7 billion management expected. Broadcom’s AI business includes both custom chip revenue and networking products — things like Ethernet switches that help stitch the data center together. In fact, the network segment was about 40% of second-quarter AI semiconductor revenue. In Broadcom’s other operating segment, Infrastructure Software , revenue growth accelerated from the prior quarter. However, revenue of $7.18 billion fell short of Wall Street expectations of $7.32 billion, marking the second consecutive quarter in which the segment missed estimates. Guidance For its current (third) fiscal quarter, Broadcom forecast total revenue of about $29.4 billion, above the $28.54 billion expected, according to estimates compiled by LSEG. Third-quarter semiconductor revenue is expected to be $20.5 billion, with AI revenue growing more than 200% year over year to $16 billion, up from $10.8 billion in the reported quarter. However, some analysts were modeling AI revenue closer to $17 billion, helping explain some of the after-hours weakness. Analysts were modeling total semiconductor revenue of $20.1 billion. Infrastructure software revenue is expected to reach $8.9 billion. The company expects fiscal third-quarter adjusted EBITDA to be approximately 68% of projected revenue, or $19.992 billion. The Street anticipated adjusted EBITDA of $19.392 billion. Adjusted operating income is expected to be roughly 67% of projected revenue, or about $19.698 billion. That compares to Street estimates of 67.5% and $19.06 billion. (Jim Cramer’s Charitable Trust is long AVGO, META, and GOOGL. See here for a full list of the stocks in the portfolio.) 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. 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