Broadcom surged more than 12% to a record high Thursday following an excellent fiscal second-quarter earnings report on Wednesday night . Here are three reasons why the chip stock should keep moving higher. 1. AI data center demand shows no signs of letting up Behind Nvidia , Broadcom is our second favorite way to invest in the artificial intelligence boom , and that part of the company’s business is poised for more growth ahead. Broadcom’s networking revenue — which is benefiting greatly from the demand to build out AI-oriented data centers — was up 44% year over year in the three months ended May 5. It accounted for 53% of sales for Broadcom’s entire semiconductor segment, up from 39% in the year-ago period, and about 30.5% of companywide revenue. Crucially, management on Wednesday raised its full-year AI revenue forecast to $11 billion, from $10 billion previously. Many on Wall Street, including us, believe the revised guide is conservative. A key source of this growth: Broadcom is the partner of choice for Club names Alphabet and Meta Platforms , along with TikTok parent ByteDance, in those companies’ efforts to build custom chips for AI applications. The other part of Broadcom’s AI business is selling products like Ethernet switches that help stitch together servers inside data centers. AI custom accelerator and networking revenue rose 280% on an annual basis to $3.1 billion in the quarter. Considering what cloud-computing giants said about their capital expenditure intentions this earnings season, we see plenty of runway left for networking and custom-chip sales. Moreover, the AI data center theme could get a boost now that Apple has officially entered the fold earlier this week, with the announcement of its generative AI software offering branded as Apple Intelligence. Putting generative AI capabilities into the pockets of consumers is a surefire way to speed up adoption and increase usage. AVGO 1Y mountain Broadcom’s stock performance over the past 12 months. 2. The cyclical legacy business is bottoming While Broadcom’s AI-related sales are on fire, its legacy hardware business — wireless, server and storage connective, broadband, and industrial — has been in the house of pain for quite some time, including in Wednesday’s report. Investors have been focused on its AI opportunity, so problems in these more cyclical end markets have recently not been an issue for the stock, which has nearly doubled over the past 12 months. The weakness has now become the opportunity. On Wednesday’s earnings call, CEO Hock Tan said the non-AI portion of its semiconductor business has bottomed out on a combined basis and will rebound into the next fiscal year. In other words, just under half of its semiconductor business is on track to become a positive contributor to companywide growth — rather than a drag on it. The setup is especially strong for the wireless portion of Broadcom’s legacy chip business. Given its size, it should be a significant contributor to the non-AI recovery. Wireless is the second-largest individual piece to the semiconductor segment, representing about 22% of revenues in the second quarter. Apple’s announcements this week increase our confidence in the wireless comeback. Broadcom won’t call them out by name, but the “large North America customer” management sometimes mentions when discussing the wireless unit is widely understood to be Apple. Tan said on the call Wednesday that customer — aka Apple — is all of Broadcom’s wireless business. As we explained Monday night, we’re betting a significant iPhone upgrade cycle will begin later this year as consumers look to buy new devices capable of running Apple Intelligence — and that’s good news for Broadcom. Currently, only high-end iPhone 15s, which were released in 2023, have an adequate processor to support the AI software package. Wall Street estimates for Broadcom’s wireless business will need to rise to reflect the increased iPhone demand we expect to see. 3. Improving financial health as debt paid down Broadcom’s blockbuster acquisition of cloud-computing software firm VMWare is off to a strong start since it closed in November. Broadcom took on a lot of debt to finance the takeover, but the company is more than capable of working that down over time due to its proven ability to generate robust free cash flow. By the end of its fiscal year, Wall Street is projecting Broadcom’s net debt level to drop to $55 billion from $64 billion currently, according to FactSet. An additional $11 billion is expected to be shaved off by the end of fiscal 2025. This matters for a few reasons. For starters, it helps support the company’s valuation multiple, which has justifiably moved up due to its AI exposure to roughly 30 times forward earnings; at the start of the calendar year, the stock traded at 23 times forward earnings. Additionally, paying down debt opens the door for Tan to find his next growth acquisition, which he’s proven to have a knack for doing successfully. Stepping up buybacks is another option. Bottom line There’s so much to still like about the Broadcom story even with the stock at fresh highs. To be sure, we may book profits after Broadcom’s 10-for-1 stock split — announced Wednesday night alongside earnings — takes effect post-market close on July 12. But that would simply be our discipline trumping conviction. Our conviction tells us Broadcom shares can keep moving higher as AI demand shows no sign of letting up, the legacy business swings back into growth mode and a healthier balance sheet gives management optionality to repurchase stock or acquire another attractive business. (Jim Cramer’s Charitable Trust is long AVGO, NVDA, META and GOOGL. 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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A sign is posted in front of a Broadcom office in San Jose, California, on June 3, 2021.
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