Citi maintains Broadcom stock Buy rating, $220 target on AI strength

Friday saw Citi analysts reiterate a Buy rating and a $220.00 price target on Broadcom Limited (NASDAQ:AVGO). The endorsement follows Broadcom’s announcement of solid performance and guidance that surpassed consensus expectations, largely attributed to the company’s robust artificial intelligence (AI) sector, which is projected to constitute 27% of its fiscal year 2025 sales. The firm’s impressive gross margins of 76.26% exceeded consensus due to favorable product mix. With a market capitalization of $844 billion, Broadcom has demonstrated strong momentum, achieving revenue growth of 40.3% in the last twelve months. InvestingPro analysis shows the company trading above its calculated Fair Value, reflecting high investor expectations for its AI initiatives.

Broadcom’s recent report highlighted two new AI engagements, which, according to Citi, should compensate for any potential negative impacts from sanctions on Bytedance and the loss of RF share at Apple (NASDAQ:AAPL). The company has also confirmed that shipments for two additional AI engagements are anticipated to be ready for tape outs by the end of the year, which Citi believes involves Apple and OpenAI. As a prominent player in the Semiconductors & Semiconductor Equipment industry, Broadcom maintains strong financial health, with InvestingPro data showing robust cash flows and moderate debt levels. Subscribers to InvestingPro can access 18 additional key insights about Broadcom’s financial position and growth prospects.

The analysts at Citi assert that the strength in Broadcom’s AI semiconductor business is expected to balance out any downside risks. These risks include the potential effects of sanctions on Bytedance, which could impact roughly 2% of Broadcom’s fiscal year 2025 sales, and the loss of Wi-Fi share at Apple, also estimated to affect about 2% of the company’s sales for the same period. The company’s financial resilience is evident in its consistent dividend growth, having raised dividends for 15 consecutive years, while maintaining an EV/EBITDA multiple of 30.76x.

Citi’s confidence in Broadcom is underpinned by the expectation that the AI business will continue to thrive throughout the year. The analysts emphasize that the company’s advancements in AI are likely to mitigate the risks associated with Bytedance sanctions and the reduced wireless share at Apple.

Broadcom’s focus on AI seems to be a strategic move that not only caters to current demand but also sets the stage for future growth, as indicated by the company’s engagement with prominent technology players. The ongoing developments in AI engagements are poised to play a critical role in shaping Broadcom’s performance and sustaining its competitive edge in the semiconductor industry.

In other recent news, Broadcom Limited reported strong financial results, surpassing Wall Street’s expectations for both revenue and earnings per share (EPS). The company achieved combined revenue of $29.8 billion and an EPS of $3.16, exceeding consensus estimates of $29.3 billion in revenue and an EPS of $3.01. A significant driver of this performance was Broadcom’s AI Semiconductor segment, which generated $4.1 billion in revenue, marking a 77% year-over-year increase. Looking forward, Broadcom has provided optimistic guidance for the April quarter, projecting revenues of $14.9 billion and an EPS of approximately $1.56, both above analysts’ expectations.

In terms of analyst ratings, Cantor Fitzgerald reaffirmed its Overweight rating with a $300 price target, while Mizuho (NYSE:MFG) Securities maintained an Outperform rating but adjusted its price target to $250. Piper Sandler and Bernstein also kept their ratings at Overweight and Outperform, respectively, both with a $250 price target. Broadcom’s AI initiatives continue to gain traction, with the company securing seven custom AI XPU customers, three of which are already shipping. Moreover, the integration of VMware (NYSE:VMW) has bolstered Broadcom’s Infrastructure Software (ETR:SOWGn) revenues, which exceeded forecasts.

The company’s non-AI semiconductor business experienced a decline in the January quarter but is expected to stabilize in the upcoming quarter. Broadcom’s management remains positive about the future, highlighting the potential for continued growth in AI-related revenues and the successful adoption of VMware’s VCF solutions by 70% of its largest software clients. These developments underscore Broadcom’s strong market position and growth potential in the technology sector.

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