HSBC Coverage on Broadcom (NASDAQ:AVGO)

HSBC has initiated coverage on Broadcom with a Hold rating and a price target of $160 per share on Tuesday. The bank cited limited upside to FY25 earnings due to slowing momentum in key segments and potential headwinds in FY26.

Key Insights

• Broadcom's Role in AI: The company is a major player in the AI sector, focusing on custom silicon and AI networking switches.

• Revenue Projections: For FY24, ASIC revenue is anticipated to grow by 185% year-over-year, but HSBC projects a decline to 23% growth in FY25, primarily due to slower growth in chip-on-wafer-on-substrate (CoWoS) capacity allocation.

  > “We expect ASIC revenue growth to fall to 23% y-o-y in FY25e, despite the addition of two new customers,” HSBC noted.

• Earnings Estimates: HSBC’s FY25 ASIC revenue estimate of $10 billion is 5% below consensus, indicating challenges in maintaining momentum against competitors like NVIDIA and AMD, which are projected to grow AI GPU revenues by 139% and 124%, respectively.

• Product Line Upgrades: Even with upgrades in Broadcom’s AI switch product line, including the Tomahawk 5, HSBC sees minimal upside for FY25. The potential EPS boost is only estimated at 3% even under optimistic conditions.

• Future Risks: Looking ahead to FY26, HSBC identified risks such as declining momentum from VMware and potential loss of market share in wireless due to Apple’s in-house Wi-Fi module development.

• Valuation Concerns: Broadcom trades at 27x FY25 earnings, a premium compared to its historical 18x multiple and higher than peers NVIDIA and AMD, which raises valuation concerns given projected slower AI revenue growth.

Conclusion

While HSBC recognizes potential upside risks from faster-than-expected growth or a strong VMware ramp-up, it concludes that Broadcom’s current risk-reward profile appears less attractive, justifying its cautious position.