If 2023 is the first year of artificial intelligence (AI) concept stocks, then 2024 is a year of accelerated development for AI concept stocks.
Since the beginning of this year, from AI chip giant NVDA to AI server and storage device manufacturer Super Micro Computer, they have all become industry winners, leading the rise of AI concept stocks. As of now, the latest financial reports of almost all AI companies, from Arm Holdings to TSMC, ACM Research (ACMR), and last week's Dell Technologies, have led to a significant increase in individual and AI concept stocks as a whole. According to relevant financial report data, the demand for AI hardware and components is growing exponentially, exceeding Wall Street's expectations.
On Thursday, diversified semiconductor manufacturer Broadcom (NASDAQ: AVGO) will become the latest AI concept stock to test this model, and it will release its Q4 financial report after the US stock market closes.
Expected slight growth in revenue and EPS
The stock price of Broadcom has risen by 25% so far this year, with a market value of $640 billion, ranking ninth in the US stock market value ranking.
Many Wall Street analysts position it as the second largest AI chip stock winner after Nvidia. But Broadcom's role in the AI field is different from Nvidia's. Nvidia dominates the market share in graphics processing unit (GPU) chips and accelerators used in data centers to run large-scale AI models, which enable programs such as ChatGPT to run. However, Broadcom is not well-known for its GPUs used for AI training and inference. Broadcom's advantage lies in the Ethernet switch chip that allows AI components to work together. For example, in April last year, Broadcom launched a new Jericho3-AI Ethernet switch chip designed specifically for high-performance connectivity of 32000 GPU clusters. The CEO of the company, Hock Tan, stated that the demand for "connecting to ultra large scale AI network systems" was a key driving force for the company's growth in the previous fiscal year.
Just before announcing its new financial report, on Wednesday (March 6th), Broadcom launched a new semiconductor product - the 5-nanometer PCI Express Gen5/Gen6 Retimer chip optimized for AI workloads, which can be used to improve high-speed interconnection between AI processors in data centers. "As the demand for AI servers continues to increase, cloud and enterprise data center providers require higher bandwidth, lower latency, lower power consumption, and an open standard based architecture to interconnect computing, accelerators, networks, and storage devices," said Botong in a press release. After the news was released, Botong's stock price rose 0.5% on Wednesday to close at $1350.
According to a survey of analysts by consulting firm FactSet, the market expects Broadcom's revenue to reach $11.8 billion in the previous quarter, higher than $8.92 billion in the same period last year and $9.3 billion in the previous quarter; Expected earnings per share (EPS) is $10.40, a slight increase from $10.33 in the same period last year.
The management of Broadcom stated in a recent earnings conference call that in the most recent quarter of 2023, the company's revenue in the field of generative AI was $1.5 billion, accounting for 20% of its semiconductor business revenue and 16% of its total revenue. The management expects that the expansion of AI accelerators based on cloud infrastructure services will result in a revenue growth rate of 30% in the fiscal year 2024. The proportion of generative AI revenue to semiconductor revenue will also increase from 15% in 2023 to 25% in 2024.
Chen Dalong, a former US stock trader at Castle Hedge Fund and currently managing his own quantitative fund, told First Financial reporters that it is expected that Broadcom will not be able to achieve explosive profit growth in the fourth quarter of last year, as it is more sensitive to industry cycles and has encountered resistance in some terminal markets it serves, such as the telecommunications market. But he added that during this financial reporting season, investors have conveyed a message to the market that AI concept stocks do not need to achieve profit growth and can also benefit from the AI boom.
For example, Dell's financial report last week showed an 11% decline in profits in the fourth quarter of last year. However, the continuous growth in demand for Dell's AI servers still boosted Dell's stock price by 32% after the financial report was released, and also drove a comprehensive rise in AI concept stocks. Similarly, the financial report released by Anmou in February showed that its profits only increased by 14% in the fourth quarter of last year. However, the company's performance guidelines stated that it will use the AI boom to drive profit growth in the AI field, which will also drive its stock price to continue rising after the financial report.
Should I buy Broadcom?
Chen Dalong told reporters that compared to the short-term response brought by betting on financial reports, Broadcom is more suitable for investors to adopt long-term investment strategies.
His reasons include: firstly, the CEO of Broadcom has received praise from the industry for his ruthless pursuit of efficiency, and it is expected that he will strive to squeeze out more profits from the recent acquisition of VMware. The acquisition of VMware also reflects Broadcom's ambition in the field of cloud computing services. Through the combination of network switch chips and cloud services, Broadcom is expected to simultaneously focus on AI software and hardware. Secondly, although it is not possible to achieve explosive growth like Nvidia due to its more diversified business, Broadcom can continue to benefit from the growth of the AI market. Finally, its trading price remains reasonable.
"Considering Broadcom's execution history and strength in network solutions, I have confidence in its long-term potential in the field of AI," he said.
According to a recent research report by analyst firm Oppenheimer, Broadcom is a good choice for investors who want to participate in the current AI boom but do not want to pay for Nvidia's 2 trillion market value. The institution analyzed that Broadcom's market value is less than one-third of Nvidia's, and its P/E ratio is only half of Nvidia's, making it "cheaper". Last Friday, Oppenheimer also raised the target price of Broadcom to $1500.
The analysts surveyed above are generally optimistic about the prospects of Broadcom in the AI hardware and enterprise software solution markets, and it is expected that Broadcom's comprehensive revenue will reach approximately $50 billion in the 2024 fiscal year.