Morgan Stanley has resumed its coverage of Broadcom (NASDAQ:AVGO) with an Overweight rating on Sunday, saying the semiconductor company remains “one of the strongest AI plays.”
AVGO shares rose 2.6% in Monday trading.
The bank’s analysts highlighted several key catalysts for their move, including Broadcom’s growth prospects in AI, potential synergies from the VMware acquisition, and recovery in its core enterprise semiconductor businesses. These factors make AVGO a compelling investment compared to other AI-focused stocks.
Morgan Stanley expects Broadcom's revenues from AI to grow from $4.2 billion in FY2023 to $14 billion in FY2025, which would represent approximately 39% of the company's projected semiconductor revenues.
"We expect Broadcom to easily meet, if not slightly exceed, AI targets," the analysts noted. They believe the company stands to benefit from the deployment of Ethernet in AI data centers, the continued ramp-up of Google's (NASDAQ:GOOGL) TPU, and the addition of two new ASIC customers.
The integration of VMware is another crucial element behind Morgan Stanley’s bullish thesis. Analysts believe the integration will help Broadcom cut costs and drive stable cash flows, contributing to double-digit revenue growth over the next three years.
“We model VMware to grow 40% from 2024-2026,” the analysts wrote. “While they are facing some customer pushback from the transition and cloud migration poses a structural threat, we believe Broadcom's strategy of focusing on VCF and streamlining products will ultimately lead to sustainable growth.”
Morgan Stanley also projects a modest recovery in Broadcom's non-AI semiconductor segments, which have faced challenges due to excess inventories in the networking and storage markets. Specifically, it expects a rebound in these segments by CY2025, bolstered by AI growth, which should help Broadcom maintain overall semiconductor revenue growth of 7% year-over-year.
Morgan Stanley’s base case scenario sees Broadcom's stock price reaching $1,658, an 18% upside from Friday's closing price.
The bull case valuation is $2,156, assuming a better-than-expected semiconductor market recovery and greater VMware synergies, while the bear case valuation is $1,044, reflecting a prolonged semiconductor downturn and integration challenges with VMware.