Broadcom Shares Robust Multi-Year Outlook: 8 Key Items Shaping the Stock Market Thursday

These are the early headlines and other items poised to influence the market at the start of the trading day. As we share this collection of market drivers, U.S. equity futures point to a mixed market open later this morning.

1. U.S. economic activity increased modestly, employment rose slightly and prices increased moderately in recent weeks, according to a mixed report published on Wednesday by the Federal Reserve that may do little to convince central bank policymakers one way or another as they weigh whether to raise interest rates at their September 15-16 meeting. (Reuters)

Like the August Flash PMI report from S&P Global, the Fed’s latest Beige Book is based on data collected through part of the month. In this case, that was August 24, and while some may think “good enough,” the reality is that oil prices, as measured by West Texas Intermediate (WTI) crude rose 9% between August 25 and September 1.

To us, this means data collected during the entire month of August will be a better indication, and that has us paying close attention to Tuesday’s ISM’s August Manufacturing PMI findings as well as what ISM’s Non-Manufacturing August PMI data reveals on Thursday at 10 a.m. ET. Following the flat Price reading of 71.1 in the August Manufacturing PMI report, the Price component in today’s findings will be top of mind for us. Same goes for its findings on the pace of job creation ahead of Thursday’s August Employment Report.

2. Broadcom on Wednesday forecast strong AI chip sales for the next two years, offering fresh evidence that Big Tech’s appetite for AI infrastructure remains undiminished as investors scrutinize returns on massive spending… Broadcom, whose custom AI chips are used by companies including Meta Platforms, Alphabet’s Google, and OpenAI, said it now expects AI chip revenue of about $115 billion in the fiscal year ending October 2027, up from a prior forecast of over $100 billion. The company expects that to double to roughly $230 billion in fiscal 2028… As Big Tech races to build AI infrastructure, bookings for Broadcom’s AI chips topped $30 billion last quarter alone. (Reuters)

We’ll have more to say in a standalone note later on Thursday morning, but that expected ramp in the custom silicon business at Broadcom (AVGO) more than supports our current $525 target. In fact, on Thursday morning, BMO Capital boosted its AVGO target to $575 from $455, while Evercore ISI reset its target at $572. Those price hikes likely reflect Broadcom CEO sharing on Wednesday night’s earnings call the company is “on target to exceed $30 in EPS in fiscal 2028.” For context, that equates to the $11.63 in EPS the market sees Broadcom delivering in the current fiscal 2206 that ends this October.

Again, more to come on this, but that rate of EPS growth compares to the market’s expected view that Nvidia (NVDA) will deliver EPS of $20.85 in 2028, up from $9.28 this year. And based on Wednesday night’s closing price for AVGO shares, if we were to go out to Broadcom’s fiscal 2028, they would be trading at a price-to-earnings growth (PEG) ratio of 0.2.

3. Snowflake’s coding assistant, Cortex Code, topped 9,100 accounts after adding more than 2,000 customers during the quarter, while enterprise chatbot CoWork expanded to 5,800 accounts. (Reuters)

4. Hewlett Packard Enterprise earnings and revenue both hit records in the latest quarter as demand for the information technology company’s hardware booms… Cloud & AI revenue for the quarter was $9 billion, up 25% from last year. Networking revenue of $2.9 billion also rose 75% from the prior year… HPE is working hard to meet demand, but component shortages have hit supply and sent costs soaring. (Barron’s)

Following the blowout results from Dell (DELL) earlier this week and the above from Snowflake, we can surmise AI adoption is rising and usage is expanding. Data points like those bring another layer of support for the AI and data center build out that is powering multiple holdings in the Pro Portfolio, from chips to networking and electricity. And we likely have another one we can add to that growing pile:

5. Shares of Ciena rose Thursday after the networking company reported better-than-expected quarterly earnings as artificial-intelligence continued to drive demand for its products. (Barron’s)

We look forward to Thursday morning’s earnings call from the Ciena (CIEN) team, but what we see in the earnings press release is very supportive for our thesis on AI adoption and expanding usage driving the demand for networking. Year over year, Ciena’s July quarter networking platform revenue climbed 44% and that equates to a 6% sequential increase. On the earnings call, we’ll focus on management comments about order and backlog levels but also any supply chain issues that may be throttling the conversion of those into revenue.

6. Microsoft is changing how it reports its finances to investors by splitting its businesses into two segments and disclosing quarterly revenue for its Azure cloud business for the first time. The changes are meant to reflect the ongoing impact of AI on Microsoft and how the company now operates. The software giant has previously reported revenue from three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. This is now simplifying to two: Agents and Infra, and Devices and Consumer. (The Verge)

In our view, this re-segmentation will reinforce the transformation of Microsoft’s (MSFT) business over the last 10 plus years from software company to cloud infrastructure that we’ve discussed with you. In the re-segmented data provided by the company, Agents and Infra accounted for 81% of revenue in the last 12 months and 88% of operating income.

Devices and Consumer will include search and advertising revenues from LinkedIn and search advertising, as well as revenue from the Xbox division and Windows OEM and devices. Agents and Infra is essentially the rest of Microsoft, including Azure, Microsoft 365 Cloud, Microsoft 365 commercial and consumer, server products, industry solutions, and the enterprise and partner services that Microsoft now calls frontier and support services.

Alongside this news, Microsoft reaffirmed its guidance for the current quarter of $89.95 billion to $90.95 billion in revenue with Agents and Infra between $75.15 billion and $75.75 billion and the balance at Devices and Consumer. Forecasted capex for the quarter is over $50 billion.

7. Economic data today per TipRanks: Initial & Continuing Jobless Claims (Weekly), S&P Global Services PMI (August), ISM Services PMI (August), EIA Natural Gas Inventories (Weekly)

8. Companies reporting today per TipRanks: AM – Ciena (CIEN), Campbell’s (CPB), Victoria’s Secret (VSXY). PM – Ambarella (AMBA), Asana (ASAN), Guidewire Software (GWRE), Lululemon (LULU), Planet Labs (PL), Smith & Wesson (SWBI), Zscaler (ZS).