JHVEPhoto/iStock Editorial via Getty Images
J.P. Morgan reiterated its Overweight rating on Broadcom (NASDAQ:AVGO) after hosting an investor group meeting with the company’s top executives, who noted that AI demand remains strong driven byinference, and they see non-AI businesses recovery and sustained VMware revenue growth.
The firm has a $325 price target on the stock.
Evercore hosted an investor group meeting with Broadcom’s President and CEO Hock Tan, CFO Kirsten Spears, and vice president of Investor Relations Ji Yoo.
Analysts led by Harlan Sur said the discussions centered around strong AI demand trends, which are driving strong growth in Broadcom’s custom AI XPU business and driving demand for its high performance networking portfolio. In addition, there are gradual recovery trends in the non-AI business and sustained growth in its VMware business.
“Overall, we see accelerating AI fundamentals combined with improving fundamentals in the non-AI semiconductor business and further VMware revenue unlock driving strong revenue and earnings growth,” said the analysts.
Key takeaways, according to the analysts, were — AI demand remains strong, with incremental demand from inferencing workloads that were not accounted for in the prior 2027 Serviceable Available Market, or SAM, forecast, potentially leading to upside.
Inference in AI is the process where a trained AI model uses its learned knowledge to make decisions or draw conclusions on new unseen data.
Other key takeaways include — strong execution in product technology development, with the 2nm 3.5D AI XPU product tape-out on track for this year, and the team is on track to tape-out first-generation AI XPU products this year with its two leading prospect engagements (the analysts believe with Arm/Softbank and OpenAI); AI compute workloads are driving strong networking demand and presenting significant dollar content capture opportunities in scale-up networking (5 to 10 times more content versus scale-up networking), according to the analysts.
In addition, Broadcom is seeing a gradual “U” shape recovery in its non-AI semiconductor business, reflected in the bookings/order inflection the team is seeing now, which could contribute to the positive EPS revision cycle next year, the analysts noted.
The VCF platform conversion is expected to sustain strong growth in its VMware business until late 2026/2027, at which point VMware’s revenue base is expected to reach $20B in annualized revenues, with growth returning to more normalized levels of mid to high single-digit percentage thereafter, the analysts added.
Another point noted by the company’s executives was that semiconductor operating margins are expected to continue expanding, driven by the operating leverage of the model, despite gross margin headwinds from the AI XPU business.
And Lastly, the company’s focus will be on reinvesting in the business over the next one to two years on the large AI growth opportunities, rather than pursuing M&A, which could dilute attention and resources, the analysts noted.