"Simplicity is the ultimate sophistication."
Some guy named Leonardo ☺
Broadcom Inc. (AVGO) just had its NVDA May 2023 moment. Broadcom's generational inflection point is so powerful it is best to keep things simple:
In one fell swoop, this statement transformed AVGO into a Top Tier Inflection, making it is a MUST OWN into year-end and well through 2025:
"Hyperscalers have begun their respective journeys to develop their own custom AI accelerators or XPUs, as well as network these XPUs with open and scalable Ethernet connectivity.
For each of them, this represents a multi-year, not a quarter-to-quarter journey. As you know, we currently have three hyper-scale customers who have developed their own multi-generational AI XPU roadmap to be deployed at varying rates over the next three years.
In 2027, we believe each of them plans to deploy 1 million XPU clusters across a single fabric. We expect this to represent an AI revenue Serviceable Addressable Market, or SAM, for XPUs and network in the range of $60 billion to $90 billion in fiscal 2027 alone."
WOW.
As hyperscalers begin to combine larger and larger clusters over the next three years to scale AI Inferencing, the demand for Broadcom’s application-specific integrated circuits, or ASICS, will grow dramatically.
A little background on ASICS:
Currently, AVGO dominates its Serviceable Available Market, with a 69% market share.
Broadcom just outlined a $75B SAM for 3 years out. The company also announced two new hyperscalers, with one of them likely being Apple. As such, we believe their SAM will actually be $100B+.
To be conservative, let's say AVGO’s market share decreases to 50%. Well, this means AI Revenues are poised to J-curve in 3 years, from $12.2B this fiscal year to ~$50B three fiscal years out. (Of course, this requires one to believe CEO Hock Tan’s math on its SAM expansion 3 years out).
Add in $21B in non-AI Semi Revenue 3 years out and $28-$30B from the VMWARE acquisition and we get $50B in Non-AI Revenues. So, $100B in Total Revenues in Fiscal 2027. This is 30% above current consensus. Meanwhile, Fiscal 2027 EPS should come in at $15, 66% above current consensus.
Similar to our most powerful inflection points this year – ROOT, POWL, WGS, RDDT, SEZL & APP – even though AVGO leapt 14% in the after-hours, with its EPS earnings power 3 years out likely headed to $15 (66% above current FY’27 consensus) the stock actually became a lot more attractive at $207 than it was at $180.
AVGO should quickly run to $240-$250 the next 1-2 months. We see $300 by next Summer/Fall… $330 in 12 months.
Cash flows will be eye-popping, allowing Broadcom to quickly retire its ~$69B debt load over the next 3-4 years, opening the door for huge buybacks and new, accretive tuck-ins.
While this is all 3 years out, even after adding ~$121B of market cap in the after-hours, now that Broadcom is positioned to do $23B of incremental AI Revenue, if one applies the 30x Price-to-Sales multiple NVDA was afforded by investors the last few quarters, that would add an incremental $690B of market cap, relative to its 4pm close.
That's an additional $150 added to $180, which again, gets us to $330 by the end of 2025.
One final note: Considering its unrivalled scale, where only NVIDIA bests them, Broadcom should be strongly positioned to hold most of its current high-60s market share three years out.
In an effort to under-promise and over-deliver, we are modeling a decrease AVGO’s market share from 69% to 50% to set the stage for upside.
In a Bull Scenario where Broadcom retains 60% market share from the likely $100B SAM, that's another $10B of AI Revenue 3 years out. Give that a 30x Price-to-Sales and we get another $300B of market cap, which would mean another ~$64 of incremental value to its shares. This gets us to $403 likely in the first half of 2026.
So, almost a double from $207ish after-hours prices.
TRADING PLAN
AVGO is a Top Tier Inflection, Conviction Level: 10. We plan to make it a Top 3 position by 10am, as any initial flush will be very short-lived.
Again, we see $240 QUICKLY… $300 by next Summer/Early Fall… $330 in 12 months… $403 in the first half of Calendar 2026.
Stop Loss: Time stop of 3 months in place. We want to own AVGO for the next few quarters. We think you should too. If we are down after the next earnings report in 3 months, we would then exit at that point.
Of course, as our process dictates, we will take risk off on the way up as our short-term, intermediate-term and long-term aforementioned levels get approached and surpassed.
AVGO 3-YEAR WEEKLY
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Disclosure: We are long AVGO stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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