Broadcom's recent financial performance has caught the attention of the investment community, highlighting not only its robust growth in the artificial intelligence (AI) sector but also the complexities of its market dynamics. Morgan Stanley released a note on Friday indicating that while Broadcom's growth in AI is not linear, it remains strong, especially as the company continues to leverage its semiconductor solutions for AI applications.
The chipmaker's late Thursday fiscal third-quarter report exceeded expectations, significantly supported by soaring demand for AI semiconductor solutions as well as the successful acquisition of VMware. The company anticipates its full-year AI revenue will reach approximately $12 billion, a notable increase from its previous forecast surpassing the $11 billion mark.
This positive outlook aligns with Morgan Stanley’s earlier estimations, which similarly projected AI revenue at around $12 billion. Broadcom's application-specific integrated circuit (ASIC) business, however, has shown variability from quarter to quarter, referred to as 'lumpy' by analysts. Morgan Stanley emphasizes that this lumpiness is expected to impact the numbers, as AI processor shipments appear to have plateaued on a quarter-over-quarter basis, while networking solutions for AI have seen a slight uptick.
Notably, Morgan Stanley stated in its client note that impressive growth is still projected, nearly tripling this year, with sequential growth anticipated to resume starting in October. Furthermore, Morgan Stanley predicts a shift in purchasing patterns among major custom silicon users such as Alphabet's Google and Amazon, which are likely to gravitate towards Nvidia next year.
Nevertheless, Broadcom is on track to onboard two new customers in 2023, believed to be none other than Meta Platforms, the parent company of Facebook, and ByteDance, which owns TikTok. Analysts believe that both Nvidia’s Mellanox division and Broadcom's networking components are set to experience 'nice' growth trajectories in the coming year. During an earnings conference call on Thursday, Broadcom’s Chief Executive Hock Tan provided insights into the company’s expectations for AI-related revenue, clarifying that it was poised to see a sequential growth increase of approximately 10%, leading to more than $3.5 billion in revenue within the fourth quarter due to strong ongoing demand for AI solutions.
Additionally, Morgan Stanley projects about 25% growth for the upcoming year, anticipating that AI revenue will ascend to just over $15 billion, while also suggesting a conservative outlook contingent upon sustained high levels of AI investments. In terms of its non-AI semiconductor markets, Tan conveyed optimism that Broadcom has reached a cyclical low, forecasting a recovery to take hold in the fourth quarter.
Although the company's shares saw a decline of 9.7% on Friday, they have still surged 24% throughout the year, reflecting a degree of resilience even in the face of volatility. While the software segments are experiencing significant quarterly variability as indicated by Morgan Stanley, the integration of VMware is reportedly on schedule, with expectations of exceeding synergy targets in the next fiscal year.
Broadcom acquired VMware—an industry-leading multi-cloud services provider—in November, aiming to bolster its software business. Looking ahead to the fiscal fourth quarter, Broadcom has projected total revenue to be around $14 billion, slightly under Wall Street's current expectation of $14.05 billion.
This forecast suggests that Broadcom might elevate its overall revenue guidance to approximately $51.5 billion for the fiscal year, a shift from its earlier projection of around $51 billion. In light of these developments, Morgan Stanley has adjusted its price target for Broadcom stock, raising it to $180 from a previous figure of $176 and maintaining an overweight rating for the stock.
While acknowledging Nvidia as their top pick within the sector, Morgan Stanley reiterated that Broadcom remains an attractive alternative for investors looking to tap into the semiconductor market's growth potential..