Development of AI technology continues to support Broadcom stock

After the quarterly report was published on 5 September 2024, Broadcom shares fell by 10%, reaching the support level of 136 USD. However, sharp growth began the following day, and by 13 September, the stock price rose by 22%. The last quarter's results exceeded expectations, and the company's management provided an optimistic forecast for the future. Under these conditions, the likelihood of further stock growth increases, potentially renewing the historical high of 184 USD.

In this article, we examine the company's business, conduct a fundamental analysis of Broadcom's report, and perform a technical analysis of AVGO shares. Based on these, we build Broadcom's stock forecast and prediction for 2024 and 2025.

About Broadcom Inc.

Broadcom Inc. is an American company founded in 1991. On 15 August 1998, it conducted an IPO, and the shares began trading on NASDAQ under the ticker BRCM. In 2016, Broadcom was acquired by Avago Technologies, which was formed due to spinning off Hewlett-Packard's semiconductor business in 2005. Avago purchased Broadcom for 37 billion USD but retained the Broadcom name, changing the stock ticker to AVGO.

The company develops and manufactures chips for wireless communication, data transmission networks, and servers. It also offers software for infrastructure management and security. Broadcom is known for its innovations in the semiconductor industry and strategic mergers, making it a key player in the global technology market.

Broadcom Inc.'s Business Model

Broadcom's business model is based on a diversified product portfolio that includes semiconductor solutions and infrastructure software. The company's revenue is generated from several key areas listed below.

Semiconductor solutions

This is Broadcom's largest source of income, contributing about 56% of revenue in 2024. The semiconductor business includes:

• Chips for data transmission networks (Ethernet, Wi-Fi, Bluetooth): used in networking equipment such as routers, switches, servers, and data centres

• Chips for mobile devices: wireless communication modules and radio frequency components used in smartphones

• Chips for data storage: controllers used in SSDs and other data storage solutions

• Solutions for broadband communication: chips for cable and satellite TV, optical transmitters, and receivers

Infrastructure software

As of 2024, this segment accounts for about 44% of Broadcom's revenue and includes:

• Software solutions for corporate infrastructure management: used in large enterprises and data centres to optimise and monitor IT infrastructure

• Security software: tools for protecting corporate data and systems

• Cloud and virtualisation solutions: Broadcom provides software for working with cloud platforms and virtual environments

Mergers and acquisitions

Broadcom actively employs a strategy of acquisitions to expand its product portfolio and enter new markets, contributing to its revenue growth. In 2023, the company completed the acquisition of VMware, which specialises in software development for virtualisation and cloud technologies. This deal significantly increased Broadcom's revenues in the software segment.

Broadcom reports its revenue in two segments: semiconductor solutions and software sales. Long-term contracts with the world's largest companies ensure stable income.

Broadcom Inc.'s report for the Q3 2024 fiscal year

Broadcom Inc. defines its fiscal quarters differently. According to the company's website, on 5 September 2024, it presented its Q3 2024 fiscal year report, which ended on 4 August 2024. During this period, the company showed strong results. Below are the report's data compared to the same period in 2023:

• Revenue: 13.07 billion USD (+47%)

• Net profit: 6.12 billion USD (+32%)

• Earnings per share: 1.24 USD (+30%)

• Operating margin: 27.93% (-1,707 basis points)

Revenue by segment:

• Semiconductor solutions: 7.30 billion USD (+5%)

• Software: 3.80 billion USD (+200%)

Broadcom's management expressed satisfaction with the Q3 2024 results, citing significant revenue growth from its software segment, mainly due to the integration of VMware. CEO Tan Hock highlighted that demand for AI-related solutions remains strong, contributing over 3 billion USD to quarterly revenue, with expectations for continued growth in the next quarter.

The company's revenue increased by 47% compared to last year's period, largely thanks to VMware. Without VMware's contribution, revenue grew by only 4%. Management expressed confidence in the continuing demand for AI and software solutions, forecasting further growth in future quarters.

Broadcom Inc.'s stock forecast for 2024

Broadcom's management provided an optimistic stock forecast for Q4 2024. Revenue is expected to be around 14 billion USD, continuing the growth trend compared to previous quarters.

The adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation) is projected to be about 64% of revenue, 130 basis points higher than the current figure. Due to higher expenses in the semiconductor business, the operating margin may decrease by approximately 100 basis points. However, the company still anticipates stable revenue and incoming profit growth.

Technical analysis of Broadcom Inc.'s (AVGO) stock

In June 2024, Broadcom's stock prices broke through resistance at 142 USD and surged upward, setting a historical high at 184 USD. This growth was driven by information about the upcoming stock split of AVGO shares, which took place on 12 July 2024. Investors often receive stock splits positively, leading to increased share value even before they occur.

After the split, interest in the shares decreased. As there was significant hype beforehand, and some investors decided to lock in profits, share price volatility increased substantially. As a result, the trading range for the shares from July to September 2024 reached 35% of their nominal value. A triangle pattern has formed on the chart, signalling further price growth. This analysis allows us to predict Broadcom's stock outlook for the end of 2024.

A breakout above the upper line of the Triangle pattern is anticipated, with the price advancing to the historical high of 184 USD. Since the target price for the pattern is higher, a breakout above the 184 USD resistance is expected, potentially pushing the price up to 200 USD.

Prices may continue to move within the Triangle pattern, rebounding from resistance at 170 USD and declining to the lower line of the pattern at 142 USD. Subsequently, growth may resume, and prices could still aim for the historical high.

Analysis and forecast of Broadcom stock for 2024

Analysis and forecast of Broadcom Inc.'s (AVGO) stock for 2025

Broadcom's stock has been trading upward on the weekly chart from October 2022. In December 2023, the prices broke through the upper line of the channel, leading to accelerated growth. This resulted in forming a new upward channel with a broader range.

Between January and June 2024, the share price remained between 120 and 142 USD, with this range now serving as a support level. Share demand tends to rise when prices fall below 142 USD, prompting price appreciation.

As long as prices stay above the 120–142 USD trading range, further growth is likely within the upward channel. The target is the channel's upper boundary, implying a breakout above the historical high of 184 USD and consolidation above that level. If the US economy develops favourably in 2025, Broadcom's shares are expected to remain in the upward channel.

A break below the support at 120 USD could lead to prices falling to around 90 USD.

Analysis and forecast of Broadcom stock for 2025

Arguments for investing in Broadcom stock

When considering long-term investments in Broadcom's shares, focusing on the company's strengths that could ensure revenue growth in 2025 and beyond is essential. Potential profits may lead to further increases not only in the company's stock price but also in dividend payments. Investing in Broadcom's shares from 2025 to 2027 may be promising for the following reasons:

• Strong demand for AI technologies and cloud solutions: Broadcom is actively expanding its presence in the artificial intelligence (AI) and cloud computing markets. Key clients, including Alphabet Inc. (NASDAQ: GOOG), Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), and Microsoft Corporation (NASDAQ: MSFT), utilise Broadcom's semiconductor solutions for their data centres and cloud platforms
• Integration of VMware: the acquisition of VMware in 2023 significantly strengthened Broadcom's position in the corporate IT systems software market. In 2024, revenues from VMware constituted a substantial portion of total revenue. Ongoing integration and expansion of the client base in corporate software are expected to continue, promising further growth in revenue and profit
• Diversified product line: Broadcom offers a wide range of products, from semiconductors for wireless communication and data centres to software for IT infrastructure management. This diversification helps the company remain resilient to market fluctuations in specific sectors. For example, if the smartphone market slows down, demand for chips for data centres or cloud technologies can offset potential losses
• Long-term contracts with major technology companies: Broadcom's key clients enter multi-year contracts for technology supplies, ensuring a stable revenue stream and reducing the risk of significant fluctuations in income

Risks of investing in Broadcom stock

Despite the positive outlook, Broadcom's shares may face several negative factors that could affect their value:

• Dependence on major clients: while an advantage, this is also a potential drawback. Broadcom heavily relies on major clients like Alphabet, Amazon, Apple, and Microsoft. If any of them reduce orders or switch to another supplier, it could exert significant pressure on the company's revenue and profits
• Volatility in the semiconductor chip market: Broadcom is highly dependent on the semiconductor market, which is cyclical and susceptible to sharp changes in demand. Expectations of a slowdown in the global semiconductor market or decreased demand for technologies could negatively impact the company's revenues
• Rising interest rates and debt burden: Broadcom has a significant debt burden, especially after acquiring VMware. Increasing interest rates could raise the costs of servicing this debt, thereby reducing profit and slowing growth
• Regulatory risks: Broadcom and other technology companies may face new regulatory restrictions in the US and Europe, particularly concerning antitrust laws. For instance, Alphabet and Apple are already dealing with antitrust lawsuits and incurring financial losses while being key clients of Broadcom

Summary

We live in an era of advanced technology, where the software and products produced by Broadcom will be in demand for a long time. One key factor supporting this demand is the development of artificial intelligence (AI) technologies, into which major tech companies invest heavily. Broadcom supplies key components for cloud services, data centres, and AI solutions, ensuring stable orders for the coming years.

Broadcom's management demonstrates confidence in the company's future by publishing optimistic revenue growth forecasts. The main growth drivers include demand for AI solutions and robust product line diversification, covering semiconductor technologies and corporate software (thanks to the acquisition of VMware).

These factors collectively increase the likelihood of further growth in Broadcom's stock price, as the company is at the forefront of global technological trends.