Why Broadcom Stock Popped on Thursday
Key Points
An analyst increased his price target on Broadcom.
He believes the opportunity related to Google's TPUs is underappreciated.
Broadcom's forecast tells a compelling story.
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Shares of Broadcom (NASDAQ: AVGO) charged sharply higher Thursday, climbing as much as 5.5%. As of 11:35 a.m. ET, the stock was still up 5.2%.
The catalyst that sent the semiconductor specialist higher was an increased price target and bullish commentary by a Wall Street analyst.
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An underappreciated opportunity
Wells Fargo analyst Aaron Rakers is enthusiastic about Broadcom, maintaining an overweight (buy) rating on the stock and raising his price target to $545 from $430. That increase came in response to the stock's relentless rise, as it closed in on the analyst's prior price target. The new benchmark represents potential upside for investors of 31% compared to Wednesday's closing price.
The analyst noted that Broadcom's stock price decline earlier this year ignored important upcoming catalysts, which fueled his bullish outlook. The biggest is the company's deepening relationship with Alphabet.
I think the analyst is onto something. Broadcom is the leading provider of Application-Specific Integrated Circuits (ASICs), specialized chips that can be customized to be more efficient for specific artificial intelligence (AI) use cases. Broadcom partners with the search giant to design and produce Google's Tensor Processing Units (TPUs).
Google recently announced that a "select group of customers" would purchase TPUs for use in their data centers. This was a first, as the company has only ever allowed use of its specialized chips on Google Cloud, allowing users to "rent" them. This opens up an entirely new market for Alphabet, while also providing an increased revenue stream for Broadcom.
Management recently revealed that Broadcom expects AI chip revenue alone to hit $100 billion in 2027. For context, in the first quarter, the company reported AI revenue (from all sources) of $8.4 billion, which works out to a run rate of $33.6 billion. This suggests Broadcom's AI-centric revenue will more than triple over the next couple of years.
Despite this pronouncement, Broadcom stock is currently selling for 24 times next year's expected revenue. This gives astute investors the opportunity to buy the stock for an attractive price before its revenue skyrockets.
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Wells Fargo is an advertising partner of Motley Fool Money. Danny Vena, CPA has positions in Alphabet and Broadcom. The Motley Fool has positions in and recommends Alphabet and Broadcom. The Motley Fool has a disclosure policy.
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