Broadcom Earnings: AI a Larger Piece of the Pie and Product Suite Remains Resilient

Narrow-moat Broadcom reported strong fiscal second-quarter results, slightly below our revenue expectations but significantly surpassing our earnings expectations. Networking demand was again strong on the back of a continued tailwind of generative AI deployment. Management noted that AI-related revenue currently represents approximately 15% of its semiconductor business. In fiscal 2022, that figure was around 10% of its semiconductor revenue, and management believes it can reach 25% of semiconductor revenue in fiscal 2024, an estimate we view as reasonable and impressive. The immediate hesitation to AI-related growth is the potential for cannibalization of its other product growth. However, we view Broadcom's networking, storage, and broadband businesses as resilient and view AI-related revenue as a tool to expand on existing growth vectors. We maintain our $640 fair value estimate for Broadcom, which reflects a 50% probability the firm's pending VMware acquisition will close within fiscal 2023.