Bank of America Securities raises Broadcom's target price to $500 and upgrades earnings forecast

Bank of America Securities reiterated Broadcom (AVGO.US) as a preferred stock with a "Buy" rating, raising the earnings per share forecasts for fiscal years 2026 and 2027 by 8% each (despite facing higher tax rates and gross margin pressure from its product mix), to $10.33 and $14.4, respectively. The target price was raised from $460 to $500, based on an unchanged 33 times the forecasted price-to-earnings ratio for fiscal year 2027.

Bank of America Securities believes that Broadcom's stock price fell in after-hours trading following the earnings announcement, possibly due to some unnecessary concerns: 1) The gap between backlog orders and the most optimistic expectations: $73 billion (and continuing to grow) in AI backlog orders, compared to the market consensus of $69 billion (over the next six quarters), and some possibly exceeding $80 billion in the most optimistic expectations. Broadcom's backlog/order visibility continues to build, and management's comments suggest that achieving $50 billion and $100 billion in AI sales in fiscal years 2026 and 2027 is possible, aligning with the most optimistic pre-call estimates; 2) The launch date of the OpenAI project: The firm still expects its contribution to fiscal year 2027 to be greater than that of fiscal year 2026, which is a good thing from a certain perspective, as it reduces the risk of the AI outlook for fiscal year 2026. In the firm's view, Broadcom's new fifth customer could be Apple (AAPL.US), considering Apple is a traditional customer and has signed long-term large-scale deployment agreements; 3) Gross margin pressure from the product mix: This is a reasonable concern, and the firm has lowered Broadcom's gross margin estimates for fiscal years 2026 and 2027 to 73% and 71% (previously 75.4% and 73.6%), but the firm believes that Broadcom's operating expenses can be controlled to keep the EBITDA margin relatively stable; and 4) Premium valuation relative to NVIDIA (NVDA.US): Compared to NVIDIA's 24 times, Broadcom's forecasted price-to-earnings ratio for fiscal year 2026 is 33 times, the largest gap historically, and this gap tends to seasonally converge in the first quarter of the calendar year