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On Friday, Raymond (NSE:RYMD) James analyst Srini Pajjuri maintained a Market Perform rating on Broadcom Limited (NASDAQ:AVGO), following the company’s first-quarter results and second-quarter revenue outlook, which both slightly exceeded expectations. The semiconductor giant, with its impressive $54.53 billion in revenue and 40.3% year-over-year growth, continues to demonstrate strong market execution. According to InvestingPro data, Broadcom maintains a "GOOD" overall financial health score, supported by robust profitability metrics. Pajjuri highlighted Broadcom’s reiteration of the potential $60-90 billion market opportunity in AI silicon by 2027, focusing on three key hyperscale customers, presumed to be Google (NASDAQ:GOOGL), Meta (NASDAQ:META), and Bytedance. This projection is a significant increase from the estimated $15-20 billion in 2024.
Broadcom’s management is actively working with two additional companies, suspected to be OpenAI and Apple (NASDAQ:AAPL), with plans to tape out XPUs within the year. The company also added two new engagements this quarter, speculated to be xAI and possibly Oracle (NYSE:ORCL), although these are not yet defined as customers by Broadcom’s standards. If Broadcom maintains its current market share of over 50% with its three primary customers, Pajjuri estimates that the company could see an earnings per share (EPS) power of $9-10 by 2027, with each additional 1 million GPU/XPU cluster representing an incremental ~$1 EPS opportunity.
Despite the promising outlook for Broadcom’s custom ASIC business and its strong execution and customer engagement, the analyst expressed caution. The competition in the market, particularly from Nvidia (NASDAQ:NVDA), is expected to be fierce, and there is no certainty that the new potential customers will move forward with volume deployment of custom ASICs. InvestingPro analysis indicates that Broadcom is currently trading above its Fair Value, with multiple valuation metrics showing elevated levels, including a P/E ratio of 142.65x. This premium valuation aligns with Pajjuri’s concerns about the stock’s pricing relative to peers.
Potential risks such as export controls were also mentioned, though Broadcom’s management does not appear to be overly concerned. In light of these factors, Raymond James prefers to recommend other companies like Nvidia, Marvell (NASDAQ:MRVL) Technology Group, Advanced Micro Devices (NASDAQ:AMD), ARM Holdings (LON:ARM), Micron Technology (NASDAQ:MU), and semiconductor capital equipment (SemiCaps) firms for investors looking to capitalize on the data center AI theme. For a deeper understanding of Broadcom’s position in the semiconductor industry, InvestingPro offers a comprehensive research report with detailed analysis of the company’s competitive position, financial health, and growth prospects, along with 15+ additional ProTips that could inform your investment decision.
In other recent news, Broadcom Inc. has reported impressive financial results for the first quarter of fiscal year 2025, surpassing Wall Street expectations. The company’s earnings per share (EPS) reached $1.60, exceeding the forecasted $1.51, while revenue climbed to $14.92 billion, surpassing the anticipated $14.62 billion. This strong performance was largely driven by a significant 77% year-over-year increase in AI revenues, which totaled $4.1 billion. Looking ahead, Broadcom has provided optimistic guidance for the second quarter, projecting consolidated revenue of $14.9 billion and AI revenue of $4.4 billion, marking a 44% year-over-year growth.
In addition to these robust earnings, Broadcom has expanded its AI partnerships, adding two new engagement partners, believed to include Apple and OpenAI. These collaborations bring the total to four significant partnerships, further enhancing Broadcom’s position in the AI market. Analyst firm KeyBanc Capital Markets has responded positively to these developments, raising its price target for Broadcom to $275 from $260, while maintaining an Overweight rating. This adjustment reflects confidence in Broadcom’s continued leadership in custom AI ASICs and the sustained demand in the AI revenue segment.
Broadcom’s strategic focus on AI technology and custom silicon solutions has positioned the company as a leader in hardware optimization for AI workloads. The company’s ongoing investment in research and development, particularly in AI semiconductor technology, underscores its commitment to innovation and growth in this sector.
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