Summary

• I'm upgrading Broadcom Inc. stock to “Strong Buy” with a fair value of $240 per share due to its custom AI chip technology and recent stock price surge.

• Broadcom's custom silicon revenue growth is expected to accelerate in FY25, driven by increased CAPEX from major Hyperscalers like Meta and OpenAI.

• I anticipate 20% revenue growth for Broadcom in FY25, with the Semiconductor Solutions segment projected to grow 30% annually, driven by custom silicon and network solutions.

• Key risks include potential acquisition of Intel's chip design business and geopolitical tensions between China and the US impacting semiconductor companies.

Broadcom headquarters in San Jose, California, United States

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Since I upgraded Broadcom Inc. (NASDAQ:AVGO) to a “Buy” rating in December 2024, the stock price has surged by more than 10%, compared to a negative S&P 500 index (SP500)(SPX) return. I highlighted its 3.5D XDSiP for custom AI chip technology in my previous article. Amid the recent sell-off for semiconductor stocks, I view this as a great opportunity to add more Broadcom stock. Therefore, I am upgrading to a “Strong Buy” rating with a fair value of $240 per share.

CAPEX Growth From Hyperscalers & 3nm XPU

As discussed in my previous articles, Broadcom provides custom ASIC technology to major Hyperscalers and large tech companies including Alphabet (GOOGL), Meta (META) and TikTok. During Meta’s Q4 earnings call, Meta’s management highlighted its custom Meta Training and Inference Accelerator (MTIA) silicon. Meta anticipates a further production ramp-up for its MTIA chips throughout 2025 to support some of their core AI training workloads. In addition, Meta plans to increase its CAPEX spending to $60-$65 billion for FY25, a notable increase from FY24’s level. Therefore, I am quite bullish on the near-term growth of Broadcom’s custom silicon portfolio.

As reported by the media, OpenAI anticipates finalizing its custom AI processor design with Broadcom, and sending to TSMC (TSM) for production. With these large customers, Broadcom is well positioned to capture the rapid growth of custom silicon market.

During Nvidia’s (NVDA) Q4 earnings call, CEO Jensen Huang indicated that custom silicon would continue to grow as a part of the total GPU market. I think the custom ASIC silicon could potentially provide cost-effective accelerator solutions for enterprise customers, a good supplement to the standard off-the-shelf GPU products.

In short, I anticipate Broadcom’s custom silicon revenue growth will accelerate in FY25, driving the overall topline growth. As depicted in the chart below, Broadcom’s revenue and adj. operating profits grew by 51% and 53% respectively in Q4 FY24, with 11% organic revenue growth excluding VMware’s contribution. During the earnings call, the management noted that their custom silicon (XPU) shipments to their three hyperscaler customers doubled during the quarter. In addition, their management was quite confident about their progress for its next generation XPUs (3nm), expecting to ship to their customers in the second half of 2025. I think the advanced processor node would help Broadcom gain more market share in the custom silicon market.

Broadcom Quarterly Results

Broadcom Quarterly Results

Outlook and Valuation

Broadcom is set to release its Q1 FY25 result on March 6th after the market close. They are guiding for around 22% growth in revenue for Q1 FY25, as detailed below.

Broadcom Outlook

Broadcom Quarterly Results

I think there are several moving pieces for Broadcom’s near-term growth. The segment of Semiconductor Solutions represents around 58% of total revenue, and grew by 12% organically in Q4 FY24. It is evident that the custom silicon and network solutions would be key growth drivers for this segment in the future. The management anticipate the total address market size will be around $17.5 billion by 2027, and Broadcom owns around 70% of the current market share. I anticipate the segment of Semiconductor Solutions will grow by 30% annually, comprising 10% growth from non-custom silicon business and 20% growth from XPU solutions. In addition, the launch of 3nm ASIC in the second half of 2025 could a notable growth driver for its XPU adoptions among Hyperscalers and AI operators, in my view.

For the Infrastructure Software business, I only assume 6% annual growth. As discussed in my previous articles, Broadcom acquired several legacy software companies such as CA and Symantec. The growth assumption in my model aligns with their historical average growth trend.

Putting together, I project Broadcom’s revenue will grow by 20% in FY25. As custom ASIC matures, I anticipate the total revenue growth will decelerate to 15% from FY28, then further slow down to 10% from FY31 onwards.

I assume 20bps annual margin expansion, driven by 10bps from reduction in SG&A expenses and 10bps from R&D operating leverage. I calculate the total operating expenses will grow by 23% annually in the near term. As discussed in my previous article, Broadcom has done an impressive job cutting costs and fully monetizing its profits from their acquired businesses.

I calculate the WACC to be 11% assuming: risk free rate 3.6%; beta 1.37; equity risk premium 6%; cost of debt 5%; equity $717 billion; debt $74 billion; tax rate 10%. With these assumptions, the DCF can be summarized as follows:

Broadcom DCF

Broadcom DCF

Discounting all the future free cash flow, the fair value of Broadcom is calculated to be $240 per share, as per my estimates.

Key Risks

As reported by the media, Broadcom has examined Intel’s (INTC) chip design and marketing businesses for a possible bid. I think it is quite possible for Intel to sell its chip design and marketing business, as the company has struggled for growth. Broadcom does have a long-term history of making large-sized acquisitions. If Broadcom makes a bid in the future, I believe Broadcom’s stock price would be under near-term pressures.

In addition, the increasing geopolitical risk between China and the US would continue to create challenges for global semiconductor companies, including Broadcom.

Conclusion

I think the custom ASIC silicon will continue to drive Broadcom’s semiconductor solution growth. As major Hyperscalers have increased their CAPEX spending for FY25, I anticipate Broadcom’s revenue growth accelerating in FY25. I am upgrading to a “Strong Buy” rating on Broadcom, with a fair value of $240 per share.