Broadcom's AI Division and VMware Acquisition Drive Strong Buy Rating, Says Citigroup Analyst

Citigroup's Christopher Danely reinstated their Strong Buy rating on Broadcom (NASDAQ: AVGO). The analyst also announced a $1,100 price target.

After Broadcom's fourth quarter and fiscal year 2023 earnings report, Danely focused on the company's "core business strength and VMware acquisition's accretion," which catalyzed their Strong Buy rating. According to the analyst, Broadcom's robust Q4 2023 results, driven by contributions from artificial intelligence (AI), played a significant role in this decision. In fact, the company's management has doubled their AI spending guidance from $4.0 billion in 2023 to over $8 billion in 2024.

Danely highlighted that Broadcom believes its AI division can compensate for any declines in its semiconductor business. This strategic move reflects the company's commitment to staying ahead in the rapidly evolving technology landscape.

In its Q4 2023 earnings report, Broadcom reported earnings per share (EPS) of $11.06, beating the Zacks Consensus Estimate by 1% and surpassing Q4 2022's $10.45 by 6.7%. The company also achieved revenue of $9.295 billion, surpassing the Zacks Consensus Estimate by 0.18% and Q4 2023's $8.93 billion by 4.1%.

Furthermore, Broadcom's adjusted EBITDA for Q4 2023 stood at $6.05 billion, up from Q4 2022's $5.72 billion. The company declared a quarterly dividend of $5.25 per share.

For the full fiscal year 2023, Broadcom reported EPS of $42.25, marking a 12.2% increase from FY 2022's $37.64. The company's revenue for FY 2023 reached $35.82 billion, up 8% from FY 2022's $33.2 billion. Additionally, the adjusted EBITDA for FY 2023 stood at $23.2 billion, up from FY 2022's $21 billion.

Including contributions from the recently acquired VMware, Broadcom's management provided guidance for FY 2024, projecting revenue of $50 billion and adjusted EBITDA at 60 percent of projected revenue. President and CEO Hock Tan stated, "In FY 2024, we expect semiconductors to sustain their mid to high single-digit revenue growth rate, with the contribution of VMware driving consolidated revenue to $50 billion and adjusted EBITDA to $30 billion."

CFO Kirsten Spears further emphasized the company's strong financial performance, stating, "In FY 2023, we achieved a record adjusted EBITDA margin of 65%, generating $17.6 billion in free cash flow (49% of revenue), demonstrating our stable and diversified business model." She also mentioned the increase in the quarterly dividend by 14% to $5.25 per share for FY 2024, targeting a record dividend of $21.00 per share for the year.

It is worth noting that 86.7% of top-rated analysts currently rate AVGO as a Strong Buy or Buy, while 13.3% consider it a Hold. No analysts recommend or strongly recommend selling the stock.

The consensus forecast among analysts is that AVGO's upcoming year will deliver earnings per share (EPS) of $39.68. If these analysts' predictions prove accurate, AVGO's next yearly EPS will be up by 18.5% on a year-over-year basis.

Since AVGO's latest quarterly report on December 6, 2023, the stock price has risen by 13.9%. On a year-over-year basis, AVGO's stock has increased by an impressive 84.9%. During this period, AVGO has outperformed the S&P 500, which has shown a growth of 15.8%.

Christopher Danely, the Citigroup analyst who reinstated the Strong Buy rating on Broadcom, is ranked in the top 7% of Wall Street analysts by WallStreetZen. With an average return of 13.5% and a win rate of 62.3%, Danely specializes in the Industrials, Consumer Cyclical, and Technology sectors.

Broadcom Inc. is a global semiconductor company that designs, develops, and supplies various semiconductor devices. The company's focus is on complex digital and mixed-signal complementary metal-oxide-semiconductor-based devices and analog III-V based products. Broadcom operates in two segments: Semiconductor Solutions and Infrastructure Software. The company's products are used in various applications, including enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation, alternative energy systems, and electronic displays. Broadcom Inc. was incorporated in 2018 and has its headquarters in San Jose, California.

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