Where will Broadcom stock be in 3 years?

Broadcom (AVGO 6.79%) investors got a reality check last week following the release of the company’s third-quarter fiscal 2024 results (for the three months ended Aug. 4). As a result, shares of the semiconductor giant fell more than 10% in a single session, even as its revenue and earnings beat expectations. The chipmaker fell victim to Wall Street’s ambitious expectations as its guidance for the current quarter missed consensus estimates.

These investors shouldn’t be too upset, though. Broadcom’s business continues to get a good boost from growing demand for custom processors and network chips that are being deployed in artificial intelligence (AI) data centers. That momentum has helped Broadcom’s price rise nearly 81% over the past year, even after the post-earnings price slump.

Let’s take a closer look at Broadcom’s latest results and see if investors should use its decline as an opportunity to buy an AI stock that could deliver healthy gains over the next three years.

Broadcom’s results demonstrate that it is playing a key role in the proliferation of AI

Broadcom’s fiscal third-quarter revenue rose 47% year over year to $13.1 billion, which was just above the consensus estimate of $12.98 billion. Its organic revenue growth (excluding the VMware acquisition that was completed last November) rose 4% year over year. Broadcom’s non-GAAP earnings rose to $1.24 per share in the latest quarter, from $1.05 per share in the year-ago period. The reading beat the consensus estimate of $1.22 per share.

However, Broadcom’s forecast of $14 billion in revenue for the current quarter fell well short of Wall Street’s $14.1 billion expectation. While it wasn’t a big mistake, investors were quick to hit the panic button as they anticipated growing adoption of the company’s AI chips to lead to a stronger outlook.

Management’s comments on the latest earnings conference call provide clear evidence that AI is indeed giving the company’s business a big boost. Broadcom’s custom AI chip sales grew 3.5x year over year. Meanwhile, sales of the company’s Ethernet switches quadrupled year-over-year, while demand for its optical switching and interconnect offerings tripled.

Based on this strong demand, Broadcom now anticipates AI revenue of $12 billion in fiscal 2024, up from its previous expectation of $11 billion. The company also raised its guidance for the full year to $51.5 billion from the previous expectation of $51 billion. Broadcom did not raise its overall revenue outlook by $1 billion, despite raising its AI revenue guidance by that margin due to weakness in non-AI semiconductor sales.

Broadcom’s revenue from non-AI networks fell 41% year over year in the latest quarter. Similarly, the server storage connectivity business was down 25% from the year-ago quarter. The weakness in these markets explains why Broadcom’s semiconductor solutions revenue rose just 5% year-over-year last quarter.

However, Broadcom’s management said it believes Broadcom’s non-AI semiconductor business has stabilized and is expected to begin a recovery in the current quarter. Analysts raised their revenue estimates for the next two fiscal years after Broadcom’s latest report.

AVGO Revenue Estimates for Current Fiscal Year Data by YCharts

The stock could deliver healthy gains over the next three years

Broadcom has been touted by some as the second most important AI chip company after Nvidia due to its solid position in the custom AI processor market. JP Morgan estimates that Broadcom could generate $150 billion in cumulative revenue from its AI customers over the next four to five years. These customers include Alphabet, Meta platformsOpenAI and ByteDance, as well as an unidentified fifth client.

Broadcom’s updated revenue forecast for fiscal 2024 suggests AI will make up 23% of the top line. This proportion is likely to increase in the future given the company’s cumulative end-market opportunity, according to JP Morgan. Overall, a recovery in Broadcom’s non-AI business along with growth in its AI business is likely to lead to an improvement in the company’s growth going forward.

It resulted in an increase in Broadcom’s earnings growth estimates after it released its latest earnings report.

AVGO EPS estimates for current fiscal year data by YCharts

Broadcom shares trade at 23 times forward earnings, a discount to Nasdaq-100 index forward earnings multiple of 29 (using the index as a proxy for technology stocks). So investors can buy Broadcom at a relatively low valuation right now and may not want to miss out on this opportunity. If the market decides to reward Broadcom with a higher valuation due to its AI-driven growth, it could provide healthy gains going forward.

For example, assuming Broadcom’s earnings rise to 29 after three years, in line with the Nasdaq-100, its stock price could reach $210 based on the $7.26 earnings per share estimate seen in the previous chart. That would be a 42% increase from current levels. So, investors looking to buy an AI stock that is capable of delivering healthy growth and is also trading at a reasonable valuation can consider buying Broadcom after its latest dip.