Broadcom Navigates AI Surge and European Setback: Eyes on $325 Target Amid Strategic Shifts

Broadcom (AVGO) has seen a slight decline, with its stock dropping 0.37% over the past two days and a total decline of 1.27%. Despite a recent slight decrease, the stock has increased by 18.95% since the beginning of the year, boasting a current market capitalization of approximately 1.29 trillion.

Morgan Stanley hosted a meeting with Broadcom's management, focusing on the strong trends in AI demand. This is driving growth in Broadcom's customized AI XPU business and its high-performance networking products. The company also noted an improvement in non-AI sectors, with the recovery mostly apparent in its VMware operations.

AI demand remains robust, with additional workloads strengthening forecasts that were initially overlooked for 2027. Broadcom is expected to complete a 2nm 3.5D AI XPU product tape-out this year, aligning with potential key collaborations with companies like Arm/SoftBank and OpenAI.

The rise of AI has boosted the demand for networking solutions, significantly enhancing value compared to traditional networks. This may considerably increase Broadcom's revenue prospects. Furthermore, non-AI semiconductor orders are showing signs of a turnaround, potentially leading to revised EPS forecasts for next year.

The VMware Cloud Foundation's transition could sustain VMware business growth until at least 2026, possibly generating up to $20 billion annually after which growth would stabilize. Although AI XPU margins face certain pressures, overall semiconductor profit margins are projected to expand.

Broadcom continues to leverage AI breakthroughs and improve its non-AI segments. As the world's second-largest AI semiconductor supplier, it reaffirmed its "overweight" rating, setting a target stock price of $325 by December 2025, an 18% increase from the July closing price.

Meanwhile, Broadcom has announced the cancellation of its $10 billion investment in a semiconductor backend testing facility in Spain. Due to stalled negotiations with the local government, this setback impacts the EU's effort to boost domestic chip production.

The plans were initially unveiled in July 2023, with EU funds earmarked to subsidize the semiconductor sector. However, delays in the environmental and zoning approvals, pending political changes, and disputes over subsidy disbursement led to shelving the project.

Broadcom remains committed to expanding its operations in Asia, focusing on its partnerships in advanced packaging to ensure supply chain continuity. Investments in existing facilities in Malaysia and Vietnam are expected to compensate for the production shortfall from the canceled Spanish project.

Concurrently, partnerships with leaders like TSMC and ASE on advanced packaging technologies are crucial for Broadcom, especially concerning its AI accelerators and network chips. These chips require sophisticated packaging technologies such as 2.5D and chiplet to enhance performance.

Broadcom's strategic shift away from European manufacturing investments reflects an adjustment towards software solutions and strategic growth, aided by key acquisitions like VMware. This shift aligns with their aim to transform into a comprehensive tech company, moving resources toward software and solutions.