Broadcom (NASDAQ:AVGO) shares have seen an astonishing 96% surge over the past year, riding high on the booming demand for its AI chips. What’s more, the semiconductor giant seems poised to sustain its strong momentum as it transforms from a value stock to a growth name.
That, at least, is the opinion of Bank of America’s Vivek Arya, an analyst whose successful predictions have landed him in the 8th spot among thousands of Wall Street stock pros.
“Historically (FY17-23) AVGO’s traditional semis/software grew at a 5-10% normalized pace. We expect growth to inflect 2x towards 13% CAGR from FY24-26, led by 24% CAGR across AI silicon and VMWare that could soon account for over half of sales,” said the 5-star analyst. “Meanwhile, cost synergies from VMWare and consistent balance sheet delivering can help expand pf-EBIT margins by 400bps towards 61%, driving pf-EPS at a 20% CAGR.”
Arya counts AVGO’s combination of “diverse growth drivers,” excellent management team, strong track record of capital appreciation, dividend growth, and superior dividend yield (for the sector) as warranting a premium valuation. Although AVGO is the tenth largest stock in the S&P 500, its institutional ownership is significantly “below market weight.” AVGO boasts a trailing 43% free cash flow, behind only Nvidia in the semi industry, and takes the first spot in the sector with its combination of 15% annual dividend growth and an indicated dividend yield of 1.25%.
By FY26, Arya thinks AVGO’s “EPS power” has the potential to reach as much as $80/share (based on 15-17%+ sales CAGR and 65-67% EBIT margins), but there’s a potential upside here too. That could come from growing AI share in custom chips and networking, and a faster recovery in non-AI traditional semiconductors compared to the assumed 3-4% compound annual growth rate. Additionally, further M&As (mergers and acquisitions) are possible next year, as AVGO’s gross leverage remains low at 2.4x while the company continues to reduce its debt.
Accordingly, Arya has raised his AVGO price target from $2,000 to a Street-high of $2,150. The new figure represents gains of 35% from current levels. Arya’s rating stays a Buy. (To watch Arya’s track record, click here)
There are risks to consider too, however. The stock has almost doubled over the past year on “perceived AI benefits,” thus it is quite vulnerable to any shift in AI sentiment. “Customer concentration (Apple, Google), large $60bn net-debt and rising NVDA competition” are also risks.
Overall, the fact that Wall Street likes this stock is clear from the Strong Buy consensus rating. This consensus is built on 22 recent Buy reviews and a single Hold. At $1,893 and change, the average price target factors in one-year returns of ~20%. (See AVGO stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
