To The Moon

Morgan Stanley raised its target price for $Broadcom(AVGO)$ ahead of its earnings report, increasing it from $338 to $357. The core view is that AVGO's investments in AI-customized chips are entering a period of explosive growth and are likely to become a powerful engine for the company's performance next year.

Driving Factors

The ASIC business is viewed as the primary growth driver, with AI-related revenue projected to reach $3.16 billion by 2026 (up 532.08% year-over-year from the original estimate of $1.78 billion). This growth stems from accelerated launches of new customers (such as the TPU project) and surging demand for inference capabilities. TPU (Tensor Processing Unit) demand has exceeded expectations, with unit growth potentially outperforming previous flat assumptions, driven by computational power requirements. The ASIC pipeline includes multiple new projects, serving as a key growth driver for 2026. Analysts assign Broadcom higher credibility due to its execution track record and customer partnerships.

Beyond ASICs, the networking business is also viewed favorably. The report forecasts AI networking revenue to grow 39% to $10.8 billion by 2026, primarily driven by Ethernet's expanding share in AI networks. Arista's cloud deployments are performing strongly, with multiple large Ethernet clusters accelerating rollouts—confirming customer preference for open, standardized Ethernet ecosystems over closed systems. Long-term, this positions AVGO to dominate the scale network market, particularly benefiting from hyperscaler spending cycles. In non-AI segments, while cyclical recovery is slower than anticipated, the report expects steady to modest growth in enterprise networking, broadband, server storage, and wireless businesses. Software revenue is also projected to achieve low single-digit growth in coming quarters. This overall stabilizes the company's foundation, allowing AI growth to be the icing on the cake rather than a high-stakes gamble. Ethernet networks are increasing their share within AI infrastructure, with AI networking revenue projected to grow 39% to $1.08 billion by 2026. Analysts believe Ethernet's open ecosystem and standardization will dominate the market long-term.

Despite the risks associated with China's export controls (such as uncertainties surrounding ByteDance's clients), the TPU project and Meta's MTIA project are progressing smoothly, offsetting potential downside risks.

Seasonal Forecast

Model AI revenue reached $5.1 billion, up 16% quarter-over-quarter. Total revenue from semiconductor solutions was $9.17 billion, while infrastructure software contributed $6.7 billion. Overall revenue totaled $15.876 billion with a gross margin of 78.1%. Earnings per share were $1.68, slightly exceeding Wall Street consensus.

If the earnings report exceeds expectations, particularly with surprising AI metrics, AVGO's stock price is likely to see another surge, bolstering market confidence in the 2026 inflection point. More importantly, this reinforces AVGO's pivotal role in the AI supply chain, potentially attracting more institutional capital inflows and alleviating pressure from its current high valuation.

Valuation

Supporting a $357 price target based on 50x ModelWare's 2026 EPS of $7.13 equates to 42x non-GAAP EPS of $8.49, positioning it at the industry's premium end. However, they believe AVGO's long-term growth potential and historical execution merit this premium. Within a risk-reward framework, the bull case projects a share price of $477 (57x $8.36 EPS, assuming accelerated new xPU customer adoption and VMware synergies exceeding expectations), while the bear case projects a decline to $228 (38x $5.99 EPS, contingent on revenue disappointments or suboptimal M&A execution). The current stock price hovers around $297, implying approximately 20% upside potential. However, the options market indicates only a 5.6% probability of a bullish scenario versus a 28.6% probability of a bearish one, reflecting market caution regarding an AI bubble.

However, I personally believe that AVGO's broad ownership base (having become an AI darling since the 2027 SAM outlook) combined with its operational resilience still underpins its valuation. The risk lies in whether the company's growth narrative could be discounted if its ASIC competitiveness weakens or it loses market share to Nvidia in networking. The upside potential stems from VMware integration and a recovery in core semiconductor demand.

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