Broadcom Inc.

🇺🇸NASDAQ Global Select
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Broadcom Inc. stock analysis AVGO overview
Bullish +65

After Earnings, Is Broadcom Stock a Buy, a Sell, or Fairly Valued? - Morningstar

📈 Morningstar raises fair value estimate for Broadcom (AVGO) to $650 per share from $550 following fiscal Q2 earnings.

💰 Analysts view the company's $100 billion fiscal 2027 AI revenue guidance as conservative, projecting actual earnings well above this target.

🚀 Revenue is expected to grow by 40% through fiscal 2030, driven predominantly by the expansion of the AI chip business.

💵 Free cash flow margins are projected to remain above 40%, with annual free cash flow rising past $50 billion by fiscal 2027.

🏗️ The company plans to focus on paying down VMware acquisition debt in the short term before increasing dividends and pursuing new acquisitions.

⚠️ Shares fell 14% after hours as investors sought higher long-term guidance, though analysts believe the current price reflects a selloff reaction.

🤝 Broadcom holds a wide economic moat based on chip design intangibles, software switching costs, and efficient acquisition integration.

🔋 Management maintains an outlook for more than $100 billion in AI revenue by fiscal 2027 despite recent market skepticism.

📉 Current valuation of 18x fiscal 2028 earnings is seen as attractive compared to the analyst's fair value multiple of 25x.

⚡ Primary risks include high customer concentration in AI accelerators and reliance on TSMC for chip manufacturing supply.

Bullish Signals
  • Morningstar has increased its fair value estimate to $650 per share, indicating the stock is moderately undervalued at current levels.
  • The company's $100 billion fiscal 2027 AI revenue guidance is viewed as a 'sandbag,' suggesting actual performance will likely exceed expectations.
  • Broadcom is projected to generate over $50 billion in annual free cash flow by fiscal 2027, demonstrating exceptional financial strength.
  • The firm maintains a wide economic moat driven by proprietary chip design and high switching costs for its software products.
  • Shares are trading at 18 times consensus earnings for fiscal 2028, which is significantly lower than the analyst's fair value multiple of 25x.
  • Broadcom has successfully integrated disparate businesses to create a wide moat while maintaining impressive operating and economic profit margins.
  • The company is expected to continue growing revenue in the mid-to-high teens through the end of the decade due to immense demand for AI chips.
Risk Factors
  • Shares dropped 14% after hours as investors expressed disappointment that management did not raise its long-term AI revenue guidance.
  • Broadcom faces significant customer concentration risk, with a small handful of large clients like Google driving the bulk of its AI accelerator revenue.
  • There is uncertainty regarding the transition of leadership as 70-year-old CEO Hock Tan retires after being integral to the company's strategy.
  • Legacy software businesses such as virtualization and mainframes are expected to exhibit moderating growth rates compared to the AI segment.
  • The company may face challenges finding large enough acquisition targets that can pass antitrust scrutiny in a competitive market.
Full Analysis
Broadcom (AVGO) reported fiscal second-quarter earnings on June 3 with results that met expectations and maintained guidance for the upcoming quarter. While shares fell 14% after hours due to investor hopes for higher long-term AI revenue targets, Morningstar analysts view the company's $100 billion fiscal 2027 AI revenue outlook as conservative, or 'sandbagged.' The firm believes Broadcom will likely earn significantly more than $10 billion per gigawatt of compute capacity, projecting close to $200 billion in AI chip revenue for fiscal 2028. Morningstar has raised its fair value estimate for Broadcom to $650 per share from $550, citing confidence in rapid long-term growth for its custom XPU chips and improved operating margins. The stock currently trades at 18 times consensus fiscal 2028 earnings, whereas Morningstar values it at 25 times based on an extremely high-quality business expected to grow in the high teens through the decade. With a 4-star rating, the analysts consider the stock moderately undervalued relative to their long-term fair value. The company is projected to achieve 40% revenue growth through fiscal 2030, driven primarily by its semiconductor and AI chip business. Broadcom maintains a wide economic moat supported by intangible assets in chip design, high switching costs for software products, and an ability to aggregate disparate businesses efficiently. Financially, the firm expects strong cash generation with free cash flow margins above 40%, projecting annual free cash flow to rise past $50 billion by fiscal 2027 as it pays down VMware-related debt. Despite its strengths, Morningstar assigns a High Uncertainty Rating due to customer concentration in AI accelerators and reliance on TSMC for supply. Key risks include potential slowdowns in AI spending, competition from Nvidia, and the transition of leadership following CEO Hock Tan's retirement. However, the company remains a top pick in semiconductors with a robust balance sheet and a history of generating enormous cash flow to fund future acquisitions and dividends.