While the S&P 500 is currently near all-time highs, chip stock Broadcom (NASDAQ: AVGO) isn’t. In recent weeks, it has fallen almost 20%.
Analysts at JP Morgan see this as a buying opportunity. In a recent research note, they said that they would be “aggressive buyers” of the stock at current levels.
Broadcom has pulled back
Broadcom is one of the biggest players in the AI infrastructure space. Next financial year (starting November), it’s targeting $100bn in AI chip sales.
Its share price has fallen recently, however. After rising above $480 in early June, it has pulled back to near $400.
One reason for this is that the company’s guidance for AI revenue this quarter in its recent earnings report was a tad below estimates at $16bn versus $17.2bn.
Another is that investors are concerned that Google – a major buyer of Broadcom’s custom chips – could look to diversify its supply chain. If it was to do so, it could slow Broadcom’s growth and there’s a degree of customer concentration risk here.
JP Morgan sees potential for big gains
Personally, I see this share price weakness as an opportunity (I’ve been buying the dip). And so do JP Morgan analysts Harlan Sur and Mayur Ramdhani.
They believe the market is underestimating the company and have a $580 price target on the name. That’s more than 40% higher than the share price today.
Their view is that Broadcom remains on track for next-gen Google TPU chip production. They noted that it has helped Google bring to market 14 of its most advanced chip designs over the past 12 years.
In their research note, they pointed out that Broadcom continues to have significant dominance in advanced chips. It also has a strong track record when it comes to execution.
A high-quality stock on sale
Should investors give this stock a closer look? I think so – as I said, I’ve been buying myself.
To my mind, there’s a lot of value on offer at the moment. With analysts expecting earnings per share of $19.20 next financial year, the forward-looking price-to-earnings (P/E) ratio is near 20.
That strikes me as very low given that Broadcom’s revenue is forecast to grow about 65% this financial year and next as a result of high demand for its AI chips and networking equipment.
It’s worth noting a lot of other firms are very bullish on the name too. For example, BNP Paribas Exane recently hiked its price target to $640 while KeyBanc went to $575.
A top AI play
Of course, the bull case here assumes that the AI buildout continues. If it suddenly grinds to a halt for some reason, Broadcom’s revenue growth could slow and we might not see $19.20 per share in earnings next financial year.
