In recent news, Broadcom (AVGO) has seen an increase in its fair value estimate as analysts raise their probability of the VMware (VMW) acquisition closing. The fair value estimate for AVGO has been raised to $815 per share from $790. This increase in valuation is attributed to recent developments, such as gaining approval in the United Kingdom and facing no legal challenges in the United States. However, caution is still advised, as China remains the final regulatory hurdle for the deal.
The surge in artificial intelligence spending at cloud hyperscalers has been a significant driver of growth for Broadcom’s networking chips. This growth has overshadowed the softness observed in some other semiconductor markets. Analysts remain impressed with Broadcom’s networking portfolio and its ability to execute with its customers. However, they believe that the company’s current valuation is outpacing its fundamentals. Investors are advised to exercise patience and wait for a potential pullback in the stock.
During the fiscal third quarter, Broadcom reported a 5% year-over-year increase and a 2% sequential increase in sales, totaling $8.9 billion, in line with guidance. Networking has been the primary growth driver for Broadcom, with revenues rising nearly 20% year over year to reach $2.8 billion. Broadcom’s networking division houses most of its AI exposure, with both its high-speed merchant silicon and custom offload processors for Google experiencing rapid growth.
While other segments of Broadcom’s semiconductor exposure have seen softer demand due to inventory reductions, the company has managed to maintain stable sales. Storage, broadband, and wireless chip sales all experienced modest growth year over year. Software sales showed a 5% year-over-year increase, driven by upselling and cross-selling within Broadcom’s small group of strategic customers.
Profitability remains solid for Broadcom, with non-GAAP operating margin increasing by 100 basis points year over year, primarily driven by higher volumes. Broadcom’s excellent profit margins are a testament to its engineering prowess and pricing power, which forms the foundation of its wide moat.
In conclusion, analysts are cautiously optimistic about Broadcom’s future prospects, considering the positive developments surrounding the VMware acquisition. The surge in AI spending at cloud hyperscalers continues to drive growth for Broadcom’s networking chips. Despite softer demand in some semiconductor markets, Broadcom has managed to maintain stable sales. Investors are advised to exercise patience and wait for a potential pullback before diving into AVGO shares. As the regulatory hurdle in China remains the last obstacle, it will be interesting to see how the VMware acquisition unfolds for Broadcom in the near future.