Investing.com -- HSBC initiated coverage on Broadcom (NASDAQ:AVGO) with a Hold rating and a price target of $160 per share on Tuesday, citing limited upside to FY25 earnings amid slowing momentum in key segments and potential headwinds in FY26.

Broadcom is a significant player in the AI sector, driven by its custom silicon and AI networking (switch) business. 

While FY24 application-specific integrated circuit (ASIC) revenue is expected to grow by 185% year-over-year, HSBC forecasts a sharp deceleration to 23% growth in FY25, citing slower expansion in chip-on-wafer-on-substrate (CoWoS) capacity allocation. 

“We expect ASIC revenue growth to fall to 23% y-o-y in FY25e, despite the addition of two new customers, given slower growth in chip-on-wafer-on-substrate (CoWoS) capacity allocation,” said the bank.

HSBC’s FY25 ASIC revenue estimate of $10 billion is 5% below consensus, highlighting challenges in maintaining momentum relative to competitors like NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD), whose AI GPU revenues are projected to grow at rates of 139% and 124%, respectively.

Despite anticipated upgrades in Broadcom’s AI switch product line, including the transition to the higher-priced Tomahawk 5, HSBC sees minimal FY25 upside. 

Even under a bullish scenario where Tomahawk 5 comprises 30% of the product mix, HSBC says the potential earnings per share (EPS) boost is estimated at just 3%.

Looking ahead to FY26, HSBC flags risks, including declining momentum from VMware (NYSE:VMW), acquired in 2023, and a potential loss of wireless market share due to Apple (NASDAQ:AAPL) possibly developing Wi-Fi modules in-house.

Valuation also remains a concern for HSBC. They note that Broadcom trades at 27x FY25 earnings, a premium to its historical 18x multiple and higher than peers NVIDIA and AMD, despite HSBC projecting slower AI revenue growth.

While HSBC acknowledges upside risks, such as faster-than-expected growth in custom silicon or a strong VMware ramp-up, the firm concludes that Broadcom’s current risk-reward profile is less attractive, justifying its cautious stance.

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