We recently compiled the list of the 15 Best Hardware Stocks According To Goldman Sachs using the latest sentiment data. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other hardware stocks.
The soaring popularity of artificial intelligence for consumer and business applications has injected fresh life into the computing industry. If we’re to rewind the hands of time and go back to 2022, the stock market environment was considerably different from what it is now. All major technology stocks, including those that are responsible for making chips that power AI workloads were down by double digit percentages in the wake of breakneck inflation and rising interest rates.
Fast forward to 2024 and the rise in valuations seems to have no end in sight. One bank that’s quite optimistic about artificial intelligence is Goldman. Goldman’s analyst teams are among the best in the world, and they spend countless hours analyzing stocks and industries for the right set of picks that could disrupt the industry.
On this front, Goldman came out with a note recently that outlined a new beginning for the computer hardware industry. According to the bank, the introduction of AI has necessitated a global shift to new hardware that can support the technology. In its note, the bank’s analysts shared:
During the pandemic, the tech hardware industry peaked as the majority of work-from-home employees purchased equipment. The space currently has fully unwind this cycle and we notice stocks like HPQ trading at 9x their 2025 earnings estimates.
Most PCs purchased during the pandemic are expected to be replaced soon. We expect discernable new features of AI, enhanced security, and stronger computational power in upcoming PC and mobile device models, incentivizing the US consumer to spend more on newer equipment than historically, creating an unusually stronger cycle.
Goldman also created a basket of stocks where the highest weighted stock has an 8% weight and there are 20 stocks in the basket. According to Goldman analyst Faris Mourad:
The basket is composed of technology hardware stocks that may benefit from PC and mobile device renovations that could include AI features. The basket can trade up to $250m in one day with no name exceeding 10% of ADV.
Considering this optimism, we decided to take a look at the top Goldman’s top 15 hardware stock picks.
Our Methodology
To make our list of the top Goldman Sachs hardware stocks, we used the top holdings of the bank’s PC & Mobile Device AI Upgrades basket (GSXUPCAI).
For these hardware stocks, we also mentioned hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
11. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Shareholders In Q1 2024: 115
Broadcom Inc. (NASDAQ:AVGO) is another semiconductor company, and one which designs and sells signal processing products. It’s quite a hot AI stock, and Morgan Stanley’s June 2024 analyst note which cut AMD’s share price target was careful to mention that Broadcom Inc. (NASDAQ:AVGO) might be a good play in the large cap segment. BofA concurred with the optimism in the same month, as it reiterated a Buy rating and a $1,680 share price target for Broadcom Inc. (NASDAQ:AVGO). The bank shared that Broadcom Inc. (NASDAQ:AVGO)’s earnings, which have since been released would mark a beat and a $50 billion guidance in full year sales. The actual results saw Broadcom Inc. (NASDAQ:AVGO)’s $10.96 in adjusted EPS and $12.49 billion in revenue beat analyst estimates of $10.84 and $12.03, respectively. The full year guidance sat at $51 billion, and the stock was up y 15% in aftermarket trading.
Broadcom Inc. (NASDAQ:AVGO)’s stable business and the potential to capture the AI market is also reflected in its forward price to earnings ratio of 31.85. This indicates that while investors do expect some growth in the future, when compared to other semiconductor stocks, the growth will be relatively tepid. Baron Funds mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q1 2024 investor letter. Here is what the fund said:
Historically, Broadcom’s semiconductor business has been a market-leading franchise with high margins and market-level growth, but the emergence of AI-related demand has spurred stronger growth across its portfolio, specifically in its Networking business unit. Broadcom’s AI-related revenue has grown from less than 5% of its semiconductor business to an expected 35% in its fiscal 2024 as its industry-leading Ethernet switch silicon business and, more importantly its custom silicon solutions, primarily the TPU for Google but with two additional customers ramping as well, have grown significantly. While custom chips tend to be less versatile and flexible than GPUs, their adoption makes sense if customers have large scale workloads with algorithms that are relatively stable, as they allow hyperscale customers to save costs on both upfront capex as well as on energy consumption. Over time, we believe that custom silicon solutions will obtain a noticeable market share of internal AI workloads, with Broadcom as the main beneficiary given its 10-year history of working with its customers, leading to a higher proportion of sales related to AI and an above-market growth in the company’s semiconductor solutions business.
Its software business is also now a more significant portion of revenues with its recent acquisition of VMWare (40% of revenues in fiscal 2024). While Broadcom is implementing its usual strategy with software acquisitions in pursuing cost synergies, in VMWare’s case, the company is also investing in the product and reducing the hurdles for up-selling customers from the basic VSphere product (server virtualization) to the broader VMWare offering including networking, storage, and a management layer, while transitioning customers from license to subscription models. This, in our view, should drive noticeable growth for the software segment in the coming years. These tailwinds would lead, in our view, to strong earnings growth and a re-rating in the stock’s valuation, creating an attractive opportunity for long-term investors.
These tailwinds are supported by a growing stream of free cash flow, an increasing dividend, and a decline in the overall share count as Broadcom continues to repurchase its own stock.
Overall, AVGO ranks in 11th place among the 15 best hardware stocks to buy according to famed investment bank. You can visit the 15 Best Hardware Stocks According To Goldman to see the other hardware stocks. While we acknowledge the potential of AVGO as an AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. The article was originally published at Insider Monkey.