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Broadcom becoming 'second best story' in AI, behind Nvidia

Broadcom (AVGO) shares are lifting off Thursday morning after reporting more-than-promising fiscal second-quarter earnings results, revenue of $12.49 billion ($12.06 billion expected) and adjusted earnings of $10.96 per share ($10.80 per share expected). The chip designer also announced a 10-for-1 stock split, which will begin trading publicly at its adjusted price starting Monday, July 15.

Bernstein Managing Director and Senior Analyst Stacy Rasgon has raised his price target on Broadcom to $1,950 per share while maintaining an Outperform rating on the chip company. He tells The Morning Brief that Broadcom has "the second best AI story in the space" — second to Nvidia (NVDA) — while finding its core business to be "cyclically weak" as it transitions further into the AI realm.

"If you go through the businesses, so their wireless business, it's mostly Apple. And for the stuff that they sell into Apple, they're mostly sole-sourced. It's RF [radio frequency] and connectivity," Rasgon breaks down the corners of tech Broadcom is concentrated in. "Same thing in like storage. Their market share is high in broadband. It's cable modems and set up their shares very high. In networking, just sort of traditional networking, it's switching and routing. It's mostly them and Marvell."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

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This post was written by Luke Carberry Mogan.

Video transcript

Broadcom shares surging after posting a beat in the second quarter, also announcing a 10 for one stocks, but we're looking at gains of just around 13.5%.

The results driven by strength in VM Ware.

Also the company's A I products which contributed to over $3 billion in sales during the quarter.

Our next has seen these results as a big win here for investors.

Joining us.

Now, we want to bring in Stacy Rok and he is the Bernstein managing director and senior analyst, Stacy.

It's great to see you here.

So we talked about this blowout quarter.

I think it's very to say here from Broadcom.

I know you just raised your price target here on the stock.

How much more bullish are you on this name following these numbers that we just got here from the company?

II, I like this stock.

I like Broadcom a lot.

Um You know, they, the there's a few things going on.

The core business is not great.

It's cyclically weak.

They're not the only ones right now, but they probably reset it at this point enough.

It actually sets the core business up really nicely.

For growth as we get in the next year.

And in the meantime, they have this, what I I always refer to as this second best A I story in the space.

I mean, NVIDIA is clearly number one broad company is, is actually number two.

And, and they make um the, the custom chips that all the hyper scalar are developing for themselves and they do A I networking.

And in fact, there, there's only two companies where the A I growth is enough to cover up anything else.

It's NVIDIA and Broadcom, that's it.

And so even though their core business has been weak, their A I business has been more than strong enough to sort of bridge that gap.

They took that A I number um up, up like this yet last night, I think the guidance for A I for them, this this year is, is quite conservative.

They're suggesting $11 billion which would actually suggest about, you know, low to mid single digit growth, half over half and actually a run rate that would be below where they were running in Q two.

That's, that's in my opinion, unlikely to happen.

They've got upside from VM Ware, they're executing on that acquisition really, really well.

And I suspect there's upside as we get into, into next year is that, is that business kind of grows in scales.

And I mean, they've got the absolute best financial performance of free cash flow margins, everything else in the space by a, by a country mile.

And even though the valuation is elevated versus its own history, it's in a really sharp discount.

So to the overall space and it's a different company that to be its half software almost, it's again, you get the, the, the great A I story.

I still think the valuation is attractive too.

I really like it.

Stacy.

I wanna follow up on that point that you just made there about their guidance, maybe given the growth that they've seen within A I, this could prove to be a conservative guide from the earnings transcript call that also stuck out to me because you asked management point blank.

That exact thing.

I'm curious from your perspective, your models, what do you think that potential growth rate could look like?

Well, I mean, it grew something like, I don't know what it was 200% or something like this, this, this last quarter.

I mean, it, it's a lot, I mean, um, now what they were suggesting on, on the call was it?

I don't think they're seeing it and they were just noting that for these, um, uh, computer offload chips that they make for the likes of Google and Meta, they only have a few customers.

So there's always the potential for some lumpiness and I, I think that's what they were calling up, but I didn't get the impression they were actually seeing anything.

I do feel like they're just, again, it's a, it's a smart management team.

They're trying to keep expectations in check, which is not a bad thing.

Um, but, but again, I mean, they, they were, they've taken this up, I think it was 5 billion to 7 billion to 10 billion and now it's 11 billion.

I wouldn't, I wouldn't be surprised to see that number exceed the, the, the current diet guidance as we go through the rest of the year, I wouldn't be surprised, Stacey, what type of market share profile do you believe that they would need to achieve in, in order to hit some of your targets uh In, in which business in, I mean, well, especially as we're thinking about the, the semiconductor landscape and the amount of networking that they're talking about on this call.

Uh I'm primarily thinking about that business where they're seeing the most growth.

But uh the A I accelerators potentially is where I was considering they've already got pretty dominant share stuff you go through the businesses.

So their wireless business, it, it's, it's mostly Apple and for the stuff that they sell into Apple, they're mostly sole sourced, it's RF and in connectivity.

Um Same thing in like storage, their, their market share is high in, in broadband.

It's, it's cable modems and set up their, their shares very high in networking.

Just sort of traditional networking.

It's a switching and routing.

It's mostly them in Marvell.

They're the 800 gorilla on the A I A six side.

It's the same thing.

Their, their, their Broadcom is by far the largest here.

Again, you have Marvell, you have a few smaller, like Taiwanese guys, but Broadcom is already sort of like the, the, the big player then to be fair.

The, these are the kind of businesses that they focus on them.

Uh Hock 10, the CEO always talks about one to invest in franchises.

Like what is it?

What does he mean to franchise dominant market share, good market structures, long revenue, visibility, um markets where customers are willing to pay for innovation.

So he has pricing power.

As long as he's, as he's investing in, in, in the technology, these are the kind of businesses that he looks at all of their semiconductor um uh segments sort of fall into those kinds of buckets.

So their, their share is pretty good in all of these Stacy.

What do you think?

This also just tells us about some of the excitement more broadly speaking within the sector when you take a look at the reaction that we're almost seeing here across the board, on the heels of this print from Broadcom, outside of bron com, obviously outside of NVIDIA.

What else?

What are some of the other names that you still view as those top plays here within A I?

Yeah, you bet.

And so by the way, Broad comes up today, I think because again, they took up the A I numbers, I think the A I got is conservative.

They, they also have this 10 for one stocks, but which I, I'm always a little hesitant, you know, I, I feel like fundamentally it shouldn't drive anything but in practice, clearly that that's probably helping some today, um, other names that are like on the A I side.

I mean, so, I mean, our top picks right now are Broadcom, nvidia and, and actually Qualcomm, um Qualcomm has the benefit of, you know, their, their, their core market, smartphones have kind of hit bottom which is good and I'm actually getting more excited about the A I opportunity, the edge for them, not even so much thinking about like upgrade cycles.

So that could happen.

It's more for them, even just content content is enough, I think um as A I functionality rolls out and they've got some option value there.

They're trying to get into the PC market now of things.

Um But I'm actually liking Qualcomm as a broader A I play like um at, at, at the, at the, at the edge rather than just in the cloud.

Certainly.

And there we're taking a look at some of the stock moves here on the day.

What do you need to hear from management on a continued basis to ensure that they're marching towards e exactly how you and, and some of your peers are growing even more optimistic on them right now.

Yeah.

I'm, I'm in luck.

Keep, keep going to keep doing what you're doing.

Right.

I mean, that's, uh, if I can keep hearing what, what the kind of stuff that we've been hearing over the last several quarters, I mean, that, that'll be more than enough.

All right, Stacey Razon, who is the Bernstein managing director and senior analyst.

Thanks so much for taking the time.

Stacy, you bet.