Is Broadcom a buy on the dip? One Wall Street analyst thinks it can almost double from here.

Broadcom (AVGO 5.25%) has emerged as a key player in the artificial intelligence race, perhaps second only to Nvidia in terms of benefit and growth from AI infrastructure development.

But like Nvidia, the stock sold off sharply after its third-quarter earnings report. While revenue and earnings per share beat expectations, Broadcom’s guidance was lighter compared to analysts’ high expectations.

With the stock down 17.5% from its all-time high, is this a buying opportunity? One analyst thinks so. The most bullish price target on Broadcom is $240, worth 71% from here.

Recent results have been solid, but analysts were hoping for more guidance

In its fiscal third quarter, Broadcom grew revenue by 47%, but that growth rate was heavily impacted by the addition of VMware to Broadcom’s results. Notably, Broadcom acquired the software giant for $69 billion last November. So his results were not part of last year’s comparisons.

Excluding VMware, Broadcom’s revenue also rose only about 4% overall. While not a big number on the surface, that revenue beat analysts’ expectations.

Broadcom also guided for about $14 billion in the current fourth quarter, which would mark a sequential increase of 7.1%. This is actually impressive, adding up to an annual growth rate of around 30% going forward. While year-over-year comparisons are clouded by the inclusion of VMware, the 7.1% quarterly growth from Q3 to Q4 would be an acceleration from last year, when revenue grew just 4.7% between Q3 and Q4 2023.

However, analysts were hoping for even more because of Broadcom’s exposure to AI. Broadcom’s AI business exploded this year. On the conference call with analysts, management noted that its custom ASIC business, which makes parts of internal artificial intelligence accelerators for major cloud companies, grew 3.5 times from the year-ago quarter. Broadcom’s Ethernet switch chips quadrupled over last year’s total. And optical lasers and interconnect grew threefold from the year-ago quarter.

But in the fourth quarter, management sees its total AI business growing 10% quarter-over-quarter to $3.5 billion, which annualizes to “only” 46% year-over-year growth. While that would normally be an incredible number, it would mark a deceleration from the hundreds of percent growth seen over the past year.

But it will be a case of bulls in the coming year

While guidance may have disappointed, it may have been somewhat conservative or skewed by continued weakness in non-AI and non-VMware spending. But AI and VMware are becoming bigger parts of the business, which should support growth over the next few years.

AI semiconductor growth is expected to be $3.5 billion this quarter, out of total semiconductor revenue of $8 billion. So now it’s close to half of Broadcom’s chip revenue. Meanwhile, VMware posted $3.8 billion in revenue last quarter, accounting for 66 percent of Broadcom’s $5.8 billion in software revenue. Next quarter, Broadcom expects $6 billion in software revenue — most or all of that growth likely coming from VMware.

But VMware seems to be growing very fast. While we don’t have year-over-year comparisons, Broadcom grew VMware’s revenue from $2.1 billion to $2.7 billion to $3.8 billion between Q1, Q2 and Q3.

Assuming VMware brings in about $4 billion in revenue in the fourth quarter, Broadcom should see VMware and AI chip revenue account for about $7.5 billion of its $14 billion revenue guidance for Q4 — or over 50%. While VMware will likely slow from its current torrid pace, these segments could still combine to grow 20% more next year.

Broadcom’s other parts are growing less, comprised of non-AI networking, storage, telecom infrastructure chips and radio frequency filters for the iPhone. While these are perhaps businesses with low single digit growth over time, many of them are in steep decline now. Non-AI networks are down 41% from last year, and server storage is down 25%. Wireless revenue, mostly from the iPhone, rose just 1%.

However, management sees these non-AI chip markets bottoming out and turning around. So even that other substantial portion of Broadcom’s revenue could grow by double digits over the next year as these other markets recover. This sets Broadcom up for potential growth of more than 20% over the next year.

With shares now trading at $140, or just under 30 times adjusted (non-GAAP) earnings for the current year ending in October, that’s not a demanding valuation, especially if interest rates fall this way as many expect.

Selling Broadcom is an opportunity. Image source: Getty Images.

The most bullish analyst on the street sees $240 in Broadcom’s future

The most optimistic analyst on Wall Street is Hans Mosesmann of Rosenblatt Securities. In fact, it recently raised its earnings estimates after its most recent earnings release. This could have been due to the belief that management was conservative, attributing the “wandering” to less important non-AI segments, or perhaps it believed that the AI ​​spending boom would be stronger for longer than the current consensus.

“We raise our estimates modestly and believe the company and its AI computing prospects, which is ‘open’ in terms of industry connectivity standards, will continue to thrive in the acceleration, AI (generative) and cloud and edge networking segments “, he wrote. in a recent note.

An AI stock with a decent dividend is hard to find

Broadcom’s portfolio, made up of half high-growth AI beneficiaries and half low-growth legacy technology segments, is an interesting mix. Non-AI shares have kept Broadcom’s valuation below that of Nvidia and others in the AI ​​space, with a reasonable dividend currently yielding 1.55%.

But if one believes AI development will continue through the end of the decade, Broadcom’s AI-exposed segments will eventually become a strong majority of the business. This should allow for multi-year upside overall, making the stock a solid buy in the recent dip.