With many signs showing the AI boom is continuing, Broadcom (NASDAQ:AVGO) will enjoy tremendous benefits from the trend going forward. What’s more, after AVGO stock declined in recent weeks, the share’s valuation looks quite attractive. And by and large, the Street appears very bullish on the name.
In light of these points, I recommend long-term, conservative investors looking to benefit from the AI revolution buy AVGO stock.
Multiple Signs Suggest the AI Boom Continues
After hyperscalers spent large sums on AI and cloud infrastructure in the first half of 2024, they signaled the pattern would continue in the second half. For example, Meta Platforms (NASDAQ:META) announced capital expenditures jumped 33% in the second quarter to $8.17 billion from the year-ago period. The company now expects to spend $37 billion to $40 billion on such items in all of 2024.
The vast majority of big tech firms’ capital outlays are being spent on AI and cloud infrastructure. “At this point, I’d rather risk building capacity before it is needed, rather than too late,” Meta CEO Mark Zuckerberg stated.
And after Alphabet’s (NASDAQ:GOOG, GOOGL) capital expenditures soared 90% YOY in the first half of 2024, CEO Sundar Pichai signaled the firm’s huge spending in this area would continue. “In tech when you are going through transitions like this…the risk of underinvesting [in AI] is dramatically higher than overinvesting,” he said.
Overall, Big Tech firms increased their spending on capital items by 50% to over $100 billion, The Financial Times reported. The newspaper noted large portions of these funds are being used to buy computer chips and build new data centers.
Since Broadcom specializes in selling chips and other data center equipment, it is well-positioned to be a major beneficiary of large tech companies’ continued spending on AI and data centers going forward. Many on the Street agree with that assessment.
The Street Remains Bullish on Broadcom
In a note to investors on Aug. 12, Bank of America wrote that worries about high AI spending dropping “are valid but premature and inconclusive.” In recent weeks, these concerns weighed on AVGO stock and its peers. Much of the Street worried that companies’ investments in AI would not produce good returns. But Bank of America believes AI can improve the quality of internet searches, boost e-commerce businesses and create entirely new revenue streams.
According to the bank, AVGO stock is the only name in the chip sector that’s likely to outperform its peers next quarter whether the space breaks out or continues to be volatile during that period.
Meanwhile, Citi stated on Aug. 10 that the “fundamentals” of the AI sector remain strong, while the overall data center chip space is “solid.” In conjunction with the note, the bank reiterated its “buy” rating on Broadcom.
What’s more, of the 41 analysts who have issued notes on AVGO stock in the last 90 days, 36 have a “buy” or a “strong buy” rating on the shares. Their average price target is $194.48, nearly 30% above the current level of AVGO stock.
Valuation and the Bottom Line on AVGO Stock
After Broadcom’s shares fell 12% for the month ending Aug. 12, the name has a forward price-to-earnings ratio of 24.7 times. That valuation is below the mean valuation of the S&P 500.
Analysts expect the company’s EPS to surge 27% next year. With AVGO positioned to benefit from the AI boom, I believe its shares are significantly undervalued.
Broadcom is generating steady, solid growth. It is unlikely to develop any revolutionary products or tremendously increase its market share going forward. Therefore, I view the name as best-suited for conservative investors at this point.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
