Broadcom (AVGO) shares moved lower in early Friday trading after the chip- and networking-equipment maker posted a solid set of fiscal-first-quarter earnings that underscored its developing potential in AI-related technologies.
The shares have more than doubled since this time last year, adding nearly $400 billion in market value, as investors repriced companies along the artificial-intelligence value chain in the wake of an explosion of interest in the new technology.
The Palo Alto, Calif.-based, tech group plays a key role in the AI rollout, where large data models require a series of networks, connected by nodes, which determine the speed at which the collection of information in one network is passed along to the next.
Broadcom's offers of application-specific integrated circuits, also known as ASIC chips, help these multiple networks communicate with each other, overcome congestion, and ultimately accelerate the speed and reliability with which they process information.
That's likely to mean that AI spending will make up around 35% of its overall chip sales, Chief Executive Hock Tan told investors late Thursday, up from the group's prior forecast of around 30%.
AI revenue boost but no change to outlook
Broadcom also noted that AI revenue quadrupled over the three months ended in January, the group's fiscal first quarter, to around $2.3 billion.
Adjusted earnings for the quarter rose 6.4% from a year earlier to $10.99 a share, while overall revenue was up 34% to just under $12 billion. Both tallies firmly topped Wall Street forecasts.
Looking into the current financial year, Tan said Broadcom would likely generate around $10 billion in AI-related revenue, a 33% gain from his prior forecast that would "more than offset weaker-than-expected demand in broadband and service storage."
"We think of the new generative-AI market as two broad segments," Tan told investors on a conference call. He detailed the group's base of hyperscalers such as Meta Platforms and Google parent Alphabet, as well as smaller businesses looking to develop AI models.
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Hyperscalers have "an almost infinite amount of data, and their model is getting subscribers to keep using this platform they have," he said. "And the investment continues vigorously with that segment. And here, ASICs custom silicon, custom AI accelerators makes plenty of sense, and that's where we focus that attention."
Still, Tan held the group's full-year revenue forecast in place at $50 billion, while reiterating an adjusted-profit margin of around 60%, which is largely why the stock is moving modestly lower in early Friday trading.
Marvell weakness holding down gains
A softer-than-expected sales outlook from smaller rival Marvell Technology (MRVL) , which operates in the same broad market for chip design and network gear, added to the shares' muted open.
"Broadcom offered what will likely be viewed as a mixed report, though we clearly are in the 'rosier-glasses' camp," said Cantor Fitzgerald analyst C.J. Muse. "Despite the modestly better-than-consensus results, management only reaffirmed its outlook for FY24 revenues and [earnings before interest, taxes, depreciation and amortization].
"Our sense — one quarter in, it's simply too early for an update from Broadcom," said Muse, who carries an overweight rating and a $1,600 price target on the stock.
Others are adjusting their near-term price targets for Broadcom based largely on its role in the AI network rollouts, while indicating caution over its concentration to two key clients and a newly reported challenge to its place in the custom-chip market by AI titan Nvidia (NVDA) .
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"AI has demonstrated itself as a clear growth driver for Broadcom," said KeyBanc Capital Markets analyst John Vinh, who carries an overweight rating on the stock. "We're increasing our price target to $1,600 as we rerate Broadcom's valuation closer to its AI peers."
Goldman Sachs analyst Toshiya Hari added $225 to his Broadcom price target, taking it to $1,550 a share, while Truist Securities analyst William Stein lifted his to $1,566 from $1,240.
Broadcom shares were marked 3.5% lower in early Friday trading to change hands at $1,355.28 each, a move that would still leave the stock with a six-month gain of around 58%.
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