Broadcom’s Stock (AVGO) Sharply Lower, Analysts Raising Targets Following Earnings

Broadcom (NASDAQ:AVGO) is experiencing a significant downturn in its stock price despite a series of positive analyst revisions following the release of its fiscal fourth-quarter earnings. The stock is trading down 8.95% at $370 this morning, a notable reaction to concerns surrounding profit margins within its rapidly expanding artificial intelligence (AI) segment. While investors appear wary of near-term profitability, numerous analysts are maintaining a bullish outlook, raising their price targets to reflect confidence in Broadcom's long-term growth potential.

Market Reaction and Margin Concerns

The immediate market reaction saw Broadcom's shares decline sharply, contrasting with the generally favorable assessment by market analysts. This price action underscores the sensitivity of markets to perceived risks associated with the costs of scaling AI operations, even amidst robust revenue growth. The stock’s performance reflects a balancing act between the allure of AI-driven expansion and the realities of margin management.

Broadcom's fiscal Q4 results showcased substantial growth, with revenue reaching $18.02 billion, a 28% increase year-over-year. Adjusted earnings per share also exceeded expectations, coming in at $1.95. Furthermore, the company's forward guidance projects first-quarter revenue of $19.1 billion, surpassing Wall Street estimates. A key driver of this growth is the AI segment, expected to double its revenue to $8.2 billion in the upcoming quarter.

Despite these strong figures, investor sentiment has been dampened by warnings of potential margin compression. Broadcom's CFO, Kirsten Spears, indicated that gross margins are expected to decrease by approximately 100 basis points sequentially. This anticipated decline is attributed to a higher proportion of revenue coming from the AI business, which carries lower margins compared to other segments. This shift in revenue mix has triggered concerns about the sustainability of Broadcom's profitability as it aggressively expands its AI capabilities.

Analyst Confidence Remains High

In response to Broadcom's earnings report and forward-looking statements, several analysts have adjusted their price targets upwards, signaling continued confidence in the company's prospects.

Deutsche Bank raised its price target to $430 from $400, maintaining a “Buy” rating, while Benchmark increased its target to $485 from $385, also with a “Buy” rating.

TD Cowen adjusted its price target to $450 from $405, keeping a “Buy” rating, and Morgan Stanley raised its target to $462 from $443, maintaining an “Overweight” rating.

Additional price target increases came from Baird ($420 from $300), Oppenheimer ($450 from $435), Citi ($480 from $415), Piper Sandler ($430 from $375), and JPMorgan ($475 from $400).

These revisions collectively paint a picture of underlying strength and potential, despite the immediate market concerns.

In conclusion, Broadcom's current stock performance reflects a market grappling with the balance between high growth and sustained profitability in the AI sector. While short-term concerns about margin compression have triggered a sell-off, the continued confidence expressed by analysts through raised price targets suggests that the underlying fundamentals of Broadcom's business remain strong, and the company is well-positioned for long-term success, albeit with potential near-term margin pressures.