Broadcom's Generative AI, Custom Silicon Future Is 'Most Vital And Attractive': Analyst

BofA analyst Vivek Arya reiterated a Buy rating on Broadcom Inc AVGO and a price target of $1200.

Arya's first take estimate is around 2.3% and 7.3% proforma EPS accretion in FY24 and FY25, with an upside to 10%+ accretion and $60+ in proforma EPS power for AVGO in CY25 if it's able to realize planned synergies and deliver faster than assumed. 

Key risks are near-term macro and longer-term in extracting VMware Inc synergies and managing the ~$67 billion in gross debt (<2.5x implied leverage, but high in absolute terms). 

Arya views any stock volatility on VMW close as an enhanced buying opportunity for a best-in-class computing vendor at a compelling valuation. VMW reduces EPS cyclicality, though with slower growth, AVGO is levered to two distinct trends: a faster but cyclical semiconductor market (7-10% CAGR) coupled with slower but more predictable and recurring revenue, mature enterprise software business (4-5% CAGR). 

VMW changed the semiconductor and software mix to 60% and 40% from the prior 78% and 22%. 

Arya noted that AVGO's power to leverage its enterprise CIO relationships and focus R&D and sales efforts on suitable applications has been an underappreciated force. 

Specific to VMW, AVGO's original goal was to improve EBITDA contribution to $8.5 billion within three years of closing vs. VMW's FY22 EBITDA at $4.7 billion. 

Arya projected AVGO and VMW to generate proforma EPS of $48.04 and $55.70 in FY24 and FY25 (up 2.3%/7.3% vs prior). 

On a CY25 basis, Arya's estimates imply $58.24 in proforma EPS, which could be $60+ if AVGO achieves synergies faster. 

Now modeling non-AI semiconductor business -5% YoY in FY24 Ex-AI, Arya modeled FY24 semiconductor sales -5% YoY vs. -3% prior. 

Peer CQ3 EPS results saw weakness across communications (December quarter tracking -5% to -50 % YoY for peers) and industrial (December quarter tracking down -10% to -30 % YoY). 

AVGO's most vital, most attractive opportunity remains in generative AI and custom silicon. 

Arya anticipates AI driving $8 billion in sales in FY24 ($4 billion in FY23), driven by Alphabet Inc GOOG GOOGL Google/Tensor Processing Unit (TPU) ($6 billion) and AI networking ($2 billion).

Susquehanna analyst Christopher Rolland maintained Broadcom with a Positive and raised the price target from $1010 to $1100.

Price Action: AVGO shares traded lower by 0.29% at $947.61 on the last check Tuesday.