Broadcom (AVGO, Financial) has seen its stock soar by 70% in the past two months, reaching a market cap of over $1 trillion, driven by investor optimism in its AI chip ventures. The company's latest earnings report projects third-quarter AI processing and network chip revenue to hit $5.1 billion, a 60% increase year-over-year, representing a third of total sales. Despite this, the forecast fell short of some investor expectations, leading to a two-day decline in Broadcom's stock price.
Bank of America analysts have highlighted potential risks, including high development costs, performance bottlenecks, and valuation concerns. Broadcom's custom AI chip business, heavily reliant on Google, faces customer concentration risks. Google's TPU orders contribute to over 80% of Broadcom's ASIC revenue, posing volatility risks if Google shifts its strategy.
Broadcom's valuation remains high, with a forward P/E ratio of 33.6x, a 23% premium over the Philadelphia Semiconductor Index, and a 13% premium over NVIDIA. Performance and cost challenges persist in the custom AI chip market, with competition from NVIDIA, Marvell, and MediaTek increasing.
Despite these hurdles, Bank of America remains optimistic about Broadcom's growth potential, citing the rising demand for AI infrastructure. The firm raised Broadcom's target price to $300, maintaining a "buy" rating.
