On Wall Street, there's no shortage of love for NVIDIA-backed Broadcom. But another artificial intelligence chipmaker, Broadcom, has also been well-valued in recent days, and analysts have wisely argued that the stock has room to go even higher. Broadcom's burgeoning AI exposure was featured prominently in optimistic surveys sent to clients by analysts at Melius, Bernstein and JPMorgan this week. Broadcom sells networking products that stitch together the pieces of the data centers where AI computing happens, as well as helping tech giants like Alphabet design custom AI processors. JPMorgan raised its growth forecast for the custom AI chip market, saying Broadcom's dominance in the field will continue. Also this week, chip analysts at Bernstein sent clients a presentation outlining why Broadcom is one of their best ideas, citing its AI opportunity, attractive valuation and more. The party started on Monday. Melius began covering Broadcom, suggesting a roughly 40% upside in price target and calling it “one of the AI stocks you should definitely own.” Club agrees, which is why we added Broadcom to our portfolio in late August, about nine months ago. Since then, the company's networking and custom chip businesses have only become more attractive as the pace of investment in AI remains frenetic. The stock has risen about 60% since we began covering it, but the best days are yet to come. Our current price target is $1,550 per share and we have a rating of 2. That means we'll be buyers when the stock dips. About 78% of Wall Street analysts covering Broadcom give the stock the equivalent of a buy, and the average price target is about $1,563, according to FactSet, suggesting an upside of more than 11% from Thursday's closing price. AVGO YTD Mountain Broadcom's year-to-date stock performance. Wall Street's recent upbeat comments came ahead of Broadcom's release of its fiscal second-quarter 2024 earnings after the market close on Wednesday. Investors will be keen to watch the company's AI semiconductor sales growth. In March, the company reported that the line item quadrupled to $2.3 billion in the first quarter. At the time, management also raised its full-year outlook for the business, saying it now sees it make up about 35% of semiconductor sales, or more than $10 billion. Previously, Broadcom had expected it to make up about 25% of chip sales. Broadcom is a sprawling company, and thanks in large part to its acquisition of VMWare last year, it has an increasingly large software business that complements its traditional hardware business. A key part of its hardware business — the part serving legacy markets like broadband and wireless — has been under pressure in recent quarters. The company's AI sales growth will give investors hope that it can overcome legacy struggles and that these lagging areas can eventually return to growth. Broadcom's AI business is split into two main segments. The first is networking, which covers a portfolio of products such as Ethernet switches and adapters that are used in data centers to connect large amounts of high-performance servers to ensure smooth, efficient data communication. Essentially, these networking chips help make up the plumbing of data centers. Large cloud computing providers and companies that run their own data centers are the main customers for these networking products. The second area of Broadcom's AI business is custom processors, where the company is best known for co-designing Alphabet's tensor processing units (TPUs). Google's parent company Alphabet and Broadcom have been collaborating on AI chip development for years, with the sixth generation of TPUs announced last month. Broadcom recently won a co-design contract for the seventh generation of chips targeted for production start in 2026, JPMorgan told clients in a note this week. More and more tech giants are looking to design their own chips, according to JPMorgan, and portfolio holding Meta Platforms is thought to be another customer of Broadcom's custom silicon business. Amazon and Microsoft also have custom chips, but both of these club names are thought to be using Marvell Technology's co-design services, according to JPMorgan analysts. JPMorgan recently raised its outlook for the custom chip market to $20 billion to $30 billion, raising the upper end of the range by $5 billion. Analysts see this market growing at a compound annual growth rate (CAGR) of 20%. Currently, Broadcom has an estimated 55% to 60% market share, while Marvell has about 13% to 15%, JP Morgan said. Alphabet, Amazon, Meta and Microsoft, the namesakes of the Club, remain big buyers of so-called merchant silicon (processors from the likes of Nvidia and Advanced Micro Devices), but custom AI chips are also becoming an increasingly important part of their computing strategies. Such chips are cheap and can be designed to do specific tasks well. AI chips made by market leader Nvidia and rival AMD are more general-purpose. Combine networking and custom silicon and we like Broadcom's position in the AI tech stock space. We recognize that Broadcom's networking business competes with Nvidia's own business, and the chips it helps the tech giant develop are also competitors for the Jensen Huang-led company. But given the size of the AI market, there's room for both, as Melius analysts argued this week. “Nvidia should be AVGO's biggest rival in accelerators and networks, but we believe it can win both,” Melius analysts wrote. We agree with that view and will continue to invest accordingly. (Jim Cramer's Charitable Trust is long NVDA, AVGO, MSFT, AMZN, GOOGL, and META. See the full list of stocks here.) As a subscriber to Jim Cramer's CNBC Investment Club, you will receive trade alerts before Jim makes any trades. Jim waits 45 minutes after sending a trade alert before buying or selling shares in the Charitable Trust's portfolio. If Jim talks about a stock on CNBC TV, he will wait 72 hours after issuing a trade alert before executing the trade. The Investment Club information above is subject to our Terms of Use and Privacy Policy, as well as Disclaimer. Receipt of any information provided in connection with the Investment Club does not create any fiduciary duty or liability. No specific results or benefits are guaranteed.
Broadcom CEO Hock Tan
Lucas Jackson | Reuters
The love for club holding never ends NVIDIA On Wall Street BroadcomAnother artificial intelligence chipmaker, has been attracting a fair amount of attention in recent days, with analysts wisely arguing that the company's shares have room to grow even further.
