Despite a post-earnings dip, analysts are raising their price target on Broadcom (AVGO) to $480 due to its strong AI business momentum. The company’s robust partnerships with tech giants and strategic financing for AI chip sales underscore its dominant position in the rapidly growing AI infrastructure market.
Broadcom is positioned to capitalize on the AI revolution.
Broadcom's Price Target Raised to $480 Despite Post-Earnings Dip, Driven by AI Dominance
Broadcom (AVGO) reported strong quarterly results, but the market's reaction was tempered by guidance that didn't offer enough upside. Despite a post-earnings sell-off, analysts at CNBC are maintaining a positive outlook, raising their price target to $480 from $425.
Quarterly Performance: A Mixed Bag
In the fiscal second quarter of 2026, ending May 3, Broadcom posted revenue of $22.19 billion, a slight miss against the consensus forecast of $22.27 billion. However, this represents a significant 48% increase year-over-year. Adjusted earnings per share (EPS) rose 54% to $2.44, surpassing the expected $2.40. Adjusted EBITDA grew an impressive 52% to $15.24 billion, beating the FactSet consensus of $15.06 billion.
The AI Engine Driving Growth
Broadcom, lauded for its high-quality semiconductor and software offerings and led by CEO Hock Tan, is a major beneficiary of the artificial intelligence boom. Its networking and custom chip businesses are at the forefront of AI development. The company's shareholder-friendly capital allocation, including dividends and buybacks, further strengthens its investment profile.
Navigating Market Expectations and AI Futures
While the market was looking for more significant AI revenue upside, Broadcom reiterated its commitment to delivering $56 billion in AI semiconductor revenues for fiscal year 2026 and at least $100 billion for fiscal year 2027. Management expressed confidence in continued AI semiconductor revenue growth through fiscal year 2028, fueled by initiatives with its six core customers, including tech giants like Alphabet (GOOGL), Anthropic, OpenAI, and Meta Platforms (META).
Key AI Partnerships and Deals:
- Google: A long-term agreement to develop and supply multiple generations of tensor processing units (TPUs) and AI networking.
- Anthropic: A deal to supply an additional 5 gigawatt (GW) of next-generation TPU-based compute, starting in 2027.
- OpenAI: A contractual commitment to deploy 1.3 GW of compute in 2027 as part of a larger 10 GW by 2029 deal.
- Meta Platforms: Expected deployment of 3 GW of compute capacity through the end of 2028.
Addressing Financing Concerns
To facilitate these large-scale chip sales, Broadcom, in partnership with Apollo and Blackstone, is establishing an AI special purpose vehicle (SPV) to provide debt financing. This move aims to ease concerns about how leading AI companies will finance these significant chip investments.
Segment Performance Highlights:
- Semiconductor Solutions: Revenue surged 78.5% year-over-year to $15 billion, exceeding expectations. AI semiconductor revenue alone jumped 143% to $10.8 billion.
- Infrastructure Software: While showing accelerated growth from the prior quarter, this segment's revenue of $7.18 billion fell short of Wall Street expectations for the second consecutive quarter.
Guidance and Future Outlook
For the current (third) fiscal quarter, Broadcom forecasts total revenue of approximately $29.4 billion, above expectations. AI revenue is projected to grow over 200% year-over-year to $16 billion. The company anticipates adjusted EBITDA to be around 68% of projected revenue ($19.992 billion).
Why the Price Target Increase?
Despite the market's cautious reaction to the guidance, analysts are encouraged by management's expectation of continued AI semiconductor revenue growth beyond 2027. The significant AI semiconductor orders booked in the quarter ($30 billion) compared to revenue ($10.8 billion) suggest strong future performance. The partnerships and the financing structure underscore Broadcom's strategic positioning in the AI infrastructure market. The price target increase reflects confidence in Broadcom's long-term AI dominance and its ability to exceed conservative forecasts.
Competitors:
- Marvell Technology
- Advanced Micro Devices (AMD)
- Nvidia (NVDA)
Key Investment Dates:
- Last Buy: Nov. 21, 2024
- Initiation Date: Aug. 24, 2023
Disclaimer: This article is for informational purposes only and does not constitute financial advice. The CNBC Investing Club holds positions in AVGO, META, and GOOGL.
