Tech stocks have soared this year, with chip designer Broadcom nearly doubling year to date, and iPhone maker Apple and software and cloud giant Microsoft soaring more than 50% each. New developments supported all three Club names Wednesday. Here are the headlines and how we feel about each stock. Analysts at Bank of America kept their Broadcom buy rating and raised their price target on the stock to $1,250 per share from $1,200 following a meeting with CEO Hock Tan. AVGO YTD mountain Broadcom YTD The Broadcom price target boost, a more than 16% premium to Tuesday’s close, reflects confidence in management’s abilities to realize strong cost synergies, profitability, and cash flows as the company integrates VMware. Based on the discussion, BofA cites as catalysts “strong multiyear visibility” into the company’s generative AI opportunities and stability in trough-level non-artificial intelligence legacy businesses that implies a rebound is on the horizon. Broadcom’s recent gains have eclipsed our $1,000 price target. We’re in the process of deciding how high to raise it. We have Broadcom as a buy as reflected by our 1 rating on the stock. Regarding anywhere workspace provider VMWare, the analysts called out management’s intended effort to move at least 60% of the deployed base to a subscription model while possibly achieving double-digit sales growth on a percentage basis. As members know, Wall Street loves subscription models, rewarding these businesses with higher valuations because of the increased visibility they provide while reducing lumpiness in sales as deals are negotiated. On the profitability side, the analysts think Broadcom can get its earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow margins back to pre-VMware deal levels over time – 65%-plus for EBITDA and 50%-plus or better on free cash flow. Aside from the VMWare acquisition, we took a position in Broadcom due to the generative AI opportunity we saw in the company’s networking business and because it’s the partner to Alphabet for designing custom AI-oriented chips (ASICs or application-specific integrated circuits). We think BofA’s view is spot on – and with the VMWare acquisition now complete, in addition to monitoring AI revenue growth, we’ll be closely watching EBITDA/cash flow performance for signs that the integration is proceeding according to plan. AAPL YTD mountain Apple YTD Bank of America also opined on Apple following this week’s federal jury ruling in favor of Fortnite maker Epic Games in its antitrust lawsuit against Alphabet ‘s Google. Epic took issue with the 30% so-called take rate that Google and Apple charge developers on sales through their respective app stores. If regulators force Google to alter its app store practices or reduce its take rate, would Apple need to do the same? In the immediate term, the BofA analysts don’t see much impact given that Google is likely to appeal the decision, which will draw out the process and therefore any required changes. BofA also noted that some of the issues raised were Google-specific while reminding investors that Apple won on nine out of 10 counts a similar Epic legal battle back in 2021. Importantly, Apple has already implemented changes on the one count it lost, which is related to Apple allowing developers to inform users of other payment methods outside of the App Store. Apple has also proactively taken steps to address some of the issues prior to the 2021 Epic ruling. For example, Apple reduced its fee for smaller developers. However, Apple must make changes starting in 2024 regarding the European Union’s Digital Markets Act (DMA). So, what’s the financial impact if Apple were to lose some App Store sales? Assuming an 85% gross margin, the Bank of America analysts said Apple’s App Store business contributed about $1 in earnings per share implying a 10-cent hit for every 10% reduction in App Store sales. Ultimately, we aren’t overly concerned. The Google appeals process will take time to play out. Moreover, with Apple’s Services overall continuing to grow and new Apple products on the way next year, it could be the case that by the time any impact is felt on App Store revenue – if it happens at all – Apple will have already found new avenues of growth to offset the hit. The company also has immense pricing power and can likely raise prices elsewhere in the Services segment if needed in order to subsidize a lower take rate, should that prove the result of this recent ruling. MSFT YTD mountain Microsoft YTD Over at Truist, taking a long-term view, the analysts initiated Microsoft with a buy rating and a three-year $600-per-share price target. The target, based on the current $375 stock price implies 60% upside, which would amount to a return of about 17% per year on average. While acknowledging the incredible year shares have had, Truist thinks there’s more upside to come due to Microsoft’s Azure cloud and artificial intelligence opportunities such as the subscription-based Copiliot AI assistant for the Office suite. In terms of 2024 revenue potential, the analysts cited a survey of over 150 information technology decision-makers at big companies that said more than 80% expect to increase spend with Microsoft and that “a quarter of those respondents expect it to increase by more than 10%.” On generative AI, given the strong adoption of Azure OpenAI Service offerings, the analysts believe that the “segment will turn into a meaningful revenue generator,” adding that their “conversations across enterprise software indicated that 2024 will be the year when generative AI applications go into production.” Microsoft is a financial backer and partner of OpenAI, the startup behind ChatGPT. As for Microsoft 365, Copilot adoption will be key to growing both seat count and average revenue per user. Supportive of the view of strong adoption in the year to come, Truist analysts said, “Over 80% of the enterprise IT buyers that we polled in [their] 2024 IT Spending Survey indicated that they are either currently using Copilot or plan to test it in the months ahead.” Security is another area in which the analysts see a material opportunity noting that Microsoft was the “largest share gainer in the cloud security market last year,” and that its market share and revenue opportunity stand to become increasingly more significant “as customers increasingly shift to cloud-based architectures.” The Truist update on Microsoft increases our conviction that despite the incredible rally we’ve seen in shares this year, further upside remains. Generative AI opportunities are only now beginning to show signs of monetization. As companies better learn to implement the technology, it stands to open up additional revenue streams and drive cloud adoption. Though we don’t have a three-year price target on shares, we do think Truist’s projection is achievable given the implied upside is largely in with earnings growth expectations over that timeframe. The Club’s near-term price target on Microsoft is $400 per share. We have the stock as a buy-equivalent 1 rating. (Jim Cramer’s Charitable Trust is long AVGO, AAPL, GOOGL, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Hock Tan, CEO of Broadcom
Lucas Jackson | Reuters
