AVGO Buy Alert: Broadcom stock is poised to benefit from the ongoing AI boom

With many signs that the AI ​​boom continues, Broadcom (NASDAQ:AVGO) will enjoy tremendous benefits from the future trend. Moreover, after AVGO’s shares have fallen in recent weeks, the stock’s valuation looks quite attractive. And in general, the street appears very optimistic in name.

In light of these points, I recommend conservative long-term investors looking to benefit from the AI ​​revolution buy AVGO stock.

Multiple signs suggest the AI ​​boom continues

After hyperscalers spent big on AI and cloud infrastructure in the first half of 2024, they signaled that the pattern will continue in the second half. For example, Meta platforms (NASDAQ:THE TARGET) announced that capital spending rose 33% in the second quarter to $8.17 billion from the year-ago period. The company now expects to spend between $37 billion and $40 billion on such items throughout 2024.

The vast majority of capital investment by large tech firms is spent on AI and cloud infrastructure. “Right now, I’d rather take the risk of building capacity before it’s needed rather than too late,” said Mark Zuckerberg, Meta’s CEO.

And after Of the alphabet (NASDAQ:Google, GOOGLE) capital spending rose 90% year-over-year in the first half of 2024, CEO Sundar Pichai signaled that the company’s huge spending in this area will continue. “In technology, when you go through transitions like this … the risk of underinvesting (in AI) is dramatically higher than overinvesting,” he said.

Overall, Big Tech firms increased their spending on capital items by 50% to more than $100 billion, The Financial Times reported. The paper noted that much of that funding is being used to buy computer chips and build new data centers.

Because Broadcom specializes in selling chips and other data center equipment, it is well positioned to be a major beneficiary of the big tech companies’ continued spending on AI and data centers going forward. Many on the Street agree with this assessment.

Street remains bullish on Broadcom

In a note to investors on Aug. 12, Bank of America wrote that concerns about the big drop in AI spending “are valid but premature and inconclusive.” In recent weeks, these concerns have weighed on shares of AVGO and its peers. Much of The Street has worried that companies’ investments in AI will not produce good returns. But Bank of America believes that artificial intelligence can improve the quality of Internet searches, boost e-commerce businesses and create entirely new revenue streams.

According to the bank, AVGO stock is the only name in the chip sector that is likely to outperform its peers next quarter, regardless of whether the space breaks out or continues to be volatile during that time.

Meanwhile, Citi said on Aug. 10 that the AI ​​sector’s “fundamentals” remain strong, while the overall data center chip space is “solid.” Along with the note, the bank reiterated its “buy” rating on Broadcom.

Additionally, out of the 41 analysts that have issued ratings on AVGO stock in the last 90 days, 36 have a “buy” or “strong buy” rating on the stock. Their average price target is $194.48, nearly 30% above AVGO’s current stock level.

Valuation and bottom line of AVGO shares

After Broadcom shares fell 12% for the month ended Aug. 12, the name has a forward price-to-earnings ratio of 24.7 times. That rating is below the average value of S&P 500.

Analysts expect the company’s EPS to grow 27% next year. Given that AVGO is positioned to benefit from the AI ​​boom, I think its stock is significantly undervalued.

Broadcom is generating steady, solid growth. It is unlikely that they will develop revolutionary products or increase their market share enormously in the future. Therefore, I think the name is best suited for conservative investors at this time.

As of the date of publication, Larry Ramer did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

At the time of publication, the responsible editor had (either directly or indirectly) no position in the securities mentioned in this article.