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Consumer tech behemoth Apple (AAPL) is doubling down on artificial intelligence (AI) to usher in the company's next wave of growth. With the debut of Apple Intelligence, the company's new AI platform, AI will be at the front and center of its latest set of products.
To that end, reports have emerged that Apple has contracted chip giant Broadcom (AVGO) to develop an AI server chip for the iPhone maker. Internally named Baltra, the company is working with Broadcom to create a chip specifically designed for AI processing.
Since the news broke, Broadcom stock has been on fire, rallying a massive 25.6%. The stock is up an impressive 118% on a year-to-date basis with the overall analyst community continuing to be bullish about the stock. Why? Let's have a closer look.
About Broadcom
Founded in 1991 and based out of San Jose, Broadcom is one of the leading semiconductor companies in the world. It designs, develops, and supplies a wide range of analog and digital integrated circuits (ICs) and other related products, creating the tiny chips that power many of our electronic devices. Broadcom also develops software for data center networking. The company currently commands a massive market cap of just over $1 trillion.
Notably, Broadcom stock also offers a dividend yield of 0.96%, based on its quarterly payout of $0.59 per share. The company has been raising dividends consistently for the past 15 years, backed by a payout ratio of 37.5% - which allows Broadcom to keep rewarding shareholders while still reserving most of its earnings for future growth initiatives.
Broadcom Delivers a Strong Q4
Apart from its dividend initiatives, Broadcom has consistently delivered strong numbers for the past several quarters. The results for the latest quarter were no different, with both revenue and earnings witnessing growth.
In Q4, Broadcom reported quarterly revenues of $14.1 billion which represented growth of 51% from the previous year. Earnings grew by 28.4% in the same period to $1.42 per share, coming in ahead of the consensus estimate of $1.39 per share. Notably, this marked the 16th consecutive quarter of earnings beats from the company.
Overall, the past 10 years have seen the company growing its revenue and earnings at CAGRs of 30% and 33%, respectively. Moreover, this is expected to continue as analysts are projecting the company to report forward revenue and earnings growth rates of 24.90% and 17.01%, compared to the sector medians of 5.60% and 8.31%.
Also during Q4, Broadcom reported net cash from operating activities of about $5.6 billion, compared to $4.8 billion in the year-ago period. Free cash flow increased as well, coming in at $5.48 billion, or 39% of revenue. Broadcom's high free cash flow sets the basis for attractive capital returns.
The company exited the quarter with a cash balance of $9.3 billion which was much higher than its short-term debt levels of $1.3 billion.
What's Driving Growth at Broadcom?
Broadcom is expressing strong optimism about the AI market, leveraging its expertise in application-specific integrated circuits (ASICs), traditional computing, and AI acceleration chips. The company has also achieved significant growth in networking.
Broadcom’s confidence in the AI server chip market is underscored by CEO Hock Tan’s outlook, who stated that the company sees substantial opportunities in AI over the next three years. According to Tan, major hyperscalers are developing custom AI accelerators, and Broadcom is currently collaborating with three large customers to develop AI chips. He expects each of these customers to deploy 1 million AI chips in networked clusters by 2027, with the market opportunity for its AI chips (referred to as XPUs) and AI networking components estimated to be between $60 billion and $90 billion by that time.
Additionally, Broadcom announced on Dec. 5 its new 3.5D eXtreme Dimension System in Package (XDSiP) platform technology. This innovation enables custom-chip customers to achieve significant advancements in interconnect density and power efficiency compared to the traditional approach. These developments underscore Broadcom’s strategic positioning in the rapidly evolving AI and networking markets.
Beyond AI, Broadcom is making significant strides in the fast-growing edge computing space. In late August 2024, the company introduced three new tools following its VMware acquisition, including advanced network appliances combining fixed wireless access and satellite connections, a new cybersecurity solution, and enhancements to its edge computing stack.
What Do Analysts Think About AVGO Stock
Analysts have attributed a rating of “Strong Buy” for the stock, and shares have already surpassed the mean and high price targets. Out of 33 analysts covering the stock, 30 have a “Strong Buy” rating and 3 have a “Hold” rating.
