Broadcom’s (AVGO) latest financial results showed that its artificial intelligence growth is not linear, but continues to be “strong,” Morgan Stanley said Friday.
Late Thursday, the chipmaker logged stronger-than-expected fiscal third-quarter results, buoyed by demand for AI semiconductor solutions and its VMware acquisition. Broadcom expects full-year AI revenue of $12 billion, up from the previous outlook of more than $11 billion.
Morgan Stanley previously estimated $12 billion in AI revenue and noted that Broadcom had characterized its application-specific integrated circuit, or ASIC, business as lumpy from quarter to quarter.
“That lumpiness did play out, as the company saw AI processors flattish (quarter on quarter), with networking for AI up slightly,” the brokerage said in a Friday note to clients. “Importantly, growth is still close to 3x this year, and sequential growth resumes in October.”
Morgan Stanley said that although it expects that buying at some of the largest users of custom silicon, such as Alphabet’s (GOOG, GOOGL) Google and Amazon.com (AMZN), will shift purchasing towards Nvidia (NVDA) next year, Broadcom is adding two new customers this year, believed to be Facebook parent Meta Platforms (META) and TikTok parent ByteDance. Nvidia’s Mellanox and Broadcom’s networking businesses are expected to grow “nicely” next year, the brokerage wrote.
Broadcom expects AI revenue to increase sequentially 10% to more than $3.5 billion in the fourth quarter amid strong AI demand, Chief Executive Hock Tan said on an earnings conference call late Thursday, according to a Capital IQ transcript.
Morgan Stanley continues to project roughly 25% growth next year to “just above” $15 billion of AI revenue, according to the note. The brokerage said there’s a “good chance (for the outlook) to prove conservative assuming AI investments continue at” high rates.
Broadcom has reached the “bottom” in its non-AI semiconductor markets, with a recovery expected in the fourth quarter, Tan told analysts Thursday.
The company’s shares were down 9.7% in Friday afternoon trade, but are up 24% so far this year.
“The software businesses are showing high quarter-to-quarter variance, but (VMware) integration is on track, and we expect the company to exceed synergy targets next year,” Morgan Stanley said. Broadcom acquired multi-cloud services provider VMware in November.
For the fiscal fourth quarter, Broadcom expects total revenue of $14 billion, compared with Wall Street’s $14.05 billion current view. The outlook would imply the company is raising its full-year revenue expectations to $51.5 billion, Tan said on the call. In June, the company projected fiscal 2024 revenue at about $51 billion.
Morgan Stanley raised its price target on the Broadcom stock to $180 from $176 while reiterating its overweight rating. The brokerage said that although it prefers Nvidia as its top sector pick, Broadcom “remains an appealing alternative.”