Broadcom's AI Contribution Surge and iPhone 15 Launch Impact: Oppenheimer Justifies Outperform

Analysts rerated Broadcom Inc AVGO before its quarterly results.

Oppenheimer analyst Rick Schafer reiterated an Outperform rating on Broadcom with a $900 price target. The analyst sees an in-line setup to 3Q print and 4Q outlook. 

He estimates a revenue of $8.85 billion vs. $8.16 billion consensus and EPS of $10.43 vs. consensus $9.59. For 4Q, the company projects $9.05 billion vs. consensus $8.54 billion and $10.77 vs. consensus $10.08, respectively.

Networking (cloud) and wireless (Apple Inc AAPL) likely lead the second half of the CY23. 

According to the analyst, accelerated genAI adoption bodes well for high-performance Tomahawk/Jericho switches. 

AVGO AI contribution is now 15% of semi-sales, up from 10% in FY22 and expected over 25% in FY24. 

According to Schafer, AI's top line likely exceeds $1 billion in 3Q. 

He sees wireless benefits likely from the upcoming seasonal iPhone 15 launch. 

Disciplined management is shipping only to end-demand. The lead time is firm at 50 weeks. 3Q gross margin expected 75%, 60bps lower on mix. 

Vmware, Inc VMW deal will likely close in FY23, pending U.S. FTC/China SAMR decisions. 

AVGO's 22 core franchises led by DC/cloud networking provide steady long-term growth, notes the analyst. 

Semiconductor (78%) expected up 2% Q/Q (+5% Y/Y). Networking (39% of semi) will likely be up 6% Q/Q (+20% Y/Y) in 3Q. 

He expects ASP will rerate materially higher as T5 replaces six T4s at double the aggregate bandwidth. Custom ASIC expected over $3 billion in FY23 from $2 billion in FY22, driven by Alphabet Inc GOOG.

Wireless (23% of semi) expected flat Q/Q and Y/Y in 3Q. Segment poised for seasonal acceleration as iPhone 15 volume production ramps 4Q. AVGO recently renewed a multi-year supply agreement with AAPL (20% customer). 

Broadband (18% of semi) expected down 6% Q/Q (+2% Y/Y). 

Software (22%) modeled up 3% Y/Y in 3Q as Brocade (Fibre Channel) continues to weigh. 

Server Storage Connectivity (17%) is expected up 2% Q/Q (+2% Y/Y) as enterprise demand moderates. 

The analyst maintained his CY23 EPS of $42.51 and CY24E EPS of $44.99. 

He estimates AVGO-VMW EPS accretion of over 8% first-year post-close. 

He sees over 10% cash-on-cash return and is bullish, given AVGO's record of accretive M&A, execution, and FCF growth/return. 

The 22 core franchises across networking, wireless, broadband, server/storage, and software support steady growth. 

He remains a long-term buyer.

Susquehanna analyst Christopher Rolland maintains Broadcom with a Positive and raised the price target from $910 to $1010.

Price Action: AVGO shares traded lower by 0.08% at $853.76 on the last check Friday.