Bull of the Day: Broadcom (AVGO)

Zacks Rank #1 (Strong Buy) stock Broadcom (AVGO) is a tech giant that is dominant in the semiconductor and software industries. Broadcom’s two main businesses provide the hardware (semiconductors) and the virtual software that allows modern data centers to run smoothly. Below is a breakdown of Broadcom’s two main business segments:

1.      Semiconductors (~60% of revenues): AVGO’s “Tomahawk” and “Jericho” chips are the industry standard for directing traffic within massive data centers. The company’s custom AI accelerators (ASICs) are designed specifically for hyperscalers. Meta Platforms (META) and Alphabet (GOOGL) use AVGO technology to power their data centers. Additionally, AVGO chips power smartphones like Apple’s (AAPL) iPhone.

2.      Infrastructure Software: Through Broadcom’s $69 billion VMware acquisition, AVGO is a leader in the private cloud business. Banks, government agencies, and other large entities rely on AVGO for software and cybersecurity.

The race for AI supremacy among big tech companies has led to the largest industrial buildout in history. While the AI data center buildout has been unprecedented thus far, guidance from big tech companies suggests that CAPEX spending will only increase over the next few years. As an AI “pick and shovel” play, AVGO is perfectly positioned to capitalize on this spending.

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Nvidia (NVDA) remains the undisputed leader in semiconductor chips. However, Nvidia’s chips are expensive and are often sold out. Although Nvidia is likely to continue to dominate, companies like Google are decoupling and de-risking their AI spending by leveraging Broadcom’s cheaper and more efficient ASIC technology.

High-margin recurring revenue is the holy grail for growth stocks. Broadcom’s subscription-based software segment provides predictable cash flow and juicy margins.

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Zacks Consensus Analyst Estimates suggest that Broadcom will grow in the high double-digits for the foreseeable future.

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Meanwhile, AVGO has beaten Zacks Consensus Estimates for 20 consecutive quarters.

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AVGO shares have trended strongly over the past year, up 45%. After a quick test of the 200-day moving average, buyers stepped in, suggesting that the trend remains very much intact.