In the last 18 months, companies part of the artificial intelligence segment, such as Broadcom (NASDAQ:AVGO) and Nvidia (NASDAQ:NVDA), have delivered market-beating returns to shareholders. Due to their spectacular returns, the two tech stocks recently announced 10-for-1 stock splits. While a stock split is a purely cosmetic corporate action, it generally results in higher liquidity and an uptick in share prices due to greater participation from retail investors. Nvidia’s stock split has already occurred, and Broadcom’s split is expected in July.
Don't Miss Our Christmas Offers:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
In addition to the recent stock splits, I am bullish on the two tech stocks due to their enviable earnings growth rates and the AI megatrend.
Broadcom’s Stellar Revenue Growth
Valued at $731 billion, Broadcom is a tech behemoth that designs, manufactures, and sells enterprise software, security, and semiconductor solutions. While Broadcom was initially a pure-play semiconductor company, it has entered other verticals, such as enterprise and network security, through accretive acquisitions.
Broadcom recently completed the acquisition of VMware, a virtualization software specialist. The big-ticket acquisition worth $69 billion allowed Broadcom to increase sales by 43% year-over-year to $12.5 billion in Fiscal Q2, ahead of estimates of $12 billion. If we exclude the acquisitions, its organic growth was still noteworthy at 12%.
Moreover, Broadcom emphasized that revenue from artificial intelligence products surged to $3.1 billion, accounting for 24.8% of total sales, primarily due to strong demand from cloud infrastructure companies.
The tech giant now expects networking sales to grow by 40%, higher than its prior guidance, which expected 35% growth in this business. It also raised its revenue guidance for Fiscal 2024 (ending in October) to $51 billion, up from $50 billion. Further, Broadcom expects AI-based revenue in Fiscal 2024 at $11 billion.
AVGO: Earnings and Dividend Growth
Similar to other asset-light tech companies, Broadcom enjoys industry-leading profit margins. It ended Q2 with a gross margin of 62% and an operating margin of 23.7%. It also reported operating income of $2.96 billion in Q2, up 42% year-over-year. Analysts tracking Broadcom expect its adjusted earnings to expand from $42.25 per share in Fiscal 2023 to $47.74 per share in Fiscal 2024 and $59.95 in 2025.
Thus, priced at 33.4x forward earnings, AVGO stock is quite expensive, given the sector median multiple, which is much lower at 23.4x. However, a growth stock such as Broadcom commands a premium valuation.
In addition to its earnings growth, Broadcom is also expanding its cash flows and dividends. In Q2, its free cash flow stood at $4.45 billion, allowing it to pay shareholders $2.44 billion via dividends, indicating a sustainable payout ratio of 54.83%.
Broadcom pays shareholders an annual dividend of $21 per share, translating to a yield of just 1.3%. However, these payouts have risen by 38% annually since 2011. A widening free cash flow and a sustainable payout ratio also provide Broadcom with the flexibility to reduce its debt and strengthen its balance sheet. With $9.8 billion in cash and a free cash flow margin of 35.6%, the tech stalwart should be able to service its long-term debt, totaling $71.59 billion.
What Is the Price Target for Broadcom Stock?
Out of the 23 analyst ratings given to AVGO stock, 21 are Buys, two are Holds, and none are Sells, indicating a Strong Buy consensus rating. The average AVGO stock price target is $1,886.43, indicating upside potential of 4.7% from current levels.
Nvidia Is on an Absolute Tear
Nvidia initially designed graphics processors for video games. In the last decade, it expanded its product line to execute data processing parallelly, enabling the company to overtake the CPU as the primary data center computing processor. Basically, Nvidia sells AI-enabled hardware, and its dominance in the disruptive AI chip market has translated to spectacular growth, which is also reflected in its share price.
Nvidia is arguably the hottest stock on the planet today. It has gained about 150% year-to-date, making it the third-largest company by market cap. The chip maker is at the epicenter of the AI megatrend and is selling picks and shovels amid a gold rush. A report from Statista forecasts AI’s total addressable market to grow from $136 billion in 2023 to over $826 billion in 2030, providing AI players such as Nvidia a platform to keep growing at an enviable pace.
Nvidia: Revenue and Earnings Growth
According to Mizuho Securities, Nvidia accounts for between 70% and 95% of the AI chip market, dominating this segment by a wide margin. A leading market share provides Nvidia with a competitive moat and pricing power, resulting in an operating margin of over 69%.
In the quarter ended in April, it increased its sales by 262% to $26 billion, while adjusted earnings were up 461% to $6.12 per share, which is remarkable for a multi-trillion-dollar giant.
In the current quarter, Nvidia expects sales to more than double year-over-year. Wall Street forecasts Nvidia to report adjusted earnings of $2.71 per share in Fiscal 2025 (ending in January), up from $1.30 per share in 2024. Additionally, earnings are forecast to expand by 31.6% to $3.57 per share in 2026. Priced at 43.6x forward earnings for Fiscal 2025, NVDA stock trades at a lofty premium compared to peers that trade at a lower multiple of 23.4x.
What Is the Price Target for NVDA Stock?
Out of the 41 analyst ratings given to NVDA stock, 38 are Buys, three are Holds, and none are Sells, indicating a Strong Buy consensus rating. The average NVDA stock price target is $156.35, indicating 26.6% upside potential from current levels.
The Takeaway
Broadcom and Nvidia are expensive and may move lower, especially amid a broader market sell-off. However, in my view, investors could see significant dips as buying opportunities, allowing them to purchase quality growth stocks at a discount
These two companies provide the required infrastructure that enables AI platforms to thrive. Further, their expanding profitability ensures the two tech stocks have adequate resources to reinvest in innovation, which should offer them a competitive moat and leading market shares, going forward.
