We recently published a list of the 10 Best AI Momentum Stocks to Benefit from Volatility Ahead. Since Broadcom Inc. (NASDAQ:AVGO) ranks 8th on the list, it deserves a deeper look.
Wolfe Research has joined the ongoing market correction chorus as more and more experts warn of volatility ahead amid soaring valuations led by AI. Wolfe Research, however, believes investors would stick to mega-cap tech stocks to survive through this volatility.
“Our sense is that volatility will continue to pick up over the summer. However, we expect this to generally benefit the Mag 7, secular growers, and the overall Momentum Trade in the weeks ahead.”
Wolfe analysts expect investors to pile into quality stocks that “they can count on” amid economic “data surprises” ahead. The firm expects “these themes to continue to benefit from an environment in which growth is slowing but the Fed is expected to kick off a deep cutting cycle.”
“Further, our sense is that the biggest companies driving these trends will once again put up very solid results during 2Q earnings season.”
Since Wolfe believes investors are poised to stick with Magnificent Seven stocks in the upcoming volatility and called The Information Technology (SPG1200-45)(XLK) and Communication Services (XLC) “big winners”, we picked Mag. 7 stocks and top 3 AI stocks from the XLK for this article. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? 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).
A semiconductor production line, showing the complex procedures of chip manufacture.
Broadcom Inc (NASDAQ:AVGO)
Number of Hedge Fund Investors: 115
AVGO is a key part of the The Technology Sector Fund (XLK), which Wolfe thinks is a “big winner.”
JPMorgan in a latest report said that Broadcom Inc (NASDAQ:AVGO) can “dominate” the high-end of the custom chips market. JPMorgan expects the high-end of the application-specific integrated circuit, or ASIC, market to reach anywhere between $20 billion and $30 billion, up from its previous estimate of $20 billion to $25 billion.
While Broadcom Inc (NASDAQ:AVGO) is directly exposed to the AI semiconductor market, some believe the stock is priced for perfection, with a P/E multiple of 52 and YTD share price gain of 30%. In the first quarter Broadcom Inc (NASDAQ:AVGO) saw a 34% revenue growth, which surprised the Wall Street. However, adjusted earnings clocked in growth that was significantly less than revenues, indicating limited margins. Broadcom Inc’s (NASDAQ:AVGO) EV/EBITDA is 22.5, much higher than its five-year average of 14 and sector median of 14. Broadcom Inc’s (NASDAQ:AVGO) debt levels are also worrying for many. It has $73,429 million in long-term debt and $2,374 million in current debt. Broadcom Inc’s (NASDAQ:AVGO) revenue growth is expected to come in at 13% next year and 15.10% over the next five years on a per-annum basis. This means Broadcom Inc (NASDAQ:AVGO) is a laggard when compared to industry leaders like NVDA. The stock’s one-year average analyst price estimate set by Wall Street is $1533, representing an upside potential of just 9%.
ClearBridge Global Growth Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its first quarter 2024 investor letter:
“Among secular growth names, Broadcom Inc. (NASDAQ:AVGO) was another notable addition. Through organic growth and accretive acquisitions, Broadcom has developed into one of the largest global technology providers serving a number of industries with its semiconductor and software products. The company generates high levels of earnings and free cash flow, which will be driven in the coming years by revenue growth and margin expansion due to the acquisition of VMware and strong adoption of the Broadcom’s AI custom silicon chips. The acquisition of VMware is off to a good start and has shifted the business mix to 60% software and 40% semiconductors, enhancing growth prospects while also providing greater downside protection from higher recurring revenue.”
Overall, Broadcom Inc. (NASDAQ:AVGO) ranks 8th on Insider Monkey’s list titled 10 Best AI Momentum Stocks to Benefit from Volatility Ahead. While we acknowledge the potential of Broadcom Inc. (NASDAQ:AVGO), our conviction lies in the belief that 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 Broadcom Inc. (NASDAQ: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. This article is originally published at Insider Monkey.