Broadcom Gets Second $420 Target as CPO Win Boosts Outlook

Key Points

• Despite Broadcom's retreat over the past month, Wall Street is raising its price targets.
• KeyCorp became the latest Wall Street player to place an over $400 target on AVGO.
• Additionally, the company's recent win in co-packaged optics technology could open up a new growth opportunity.

Since reaching its all-time high closing price of nearly $369 on Sept. 10, shares of semiconductor giant Broadcom NASDAQ: AVGO have cooled off, sliding 6% from that peak.

However, this didn’t stop one Wall Street analyst from matching Broadcom’s most bullish price target.

Below, we’ll review recent price target data around Broadcom.

We’ll also provide perspective on an emerging opportunity: co-packaged optics (CPO).

It could become an important driver of growth long-term, providing further support to AVGO’s investment thesis.

KeyCorp Analyst Joins Broadcom’s +$400 Price Target Club

On Sept. 30, KeyCorp analyst John Vihn became the latest forecaster to move his Broadcom price target above the $400 mark. Vihn raised his target on Broadcom by 5% from $400 to $420. Vihn’s target is now tied with the most bullish ever tracked by MarketBeat. Analyst Arthur Lai notably placed a $420 price target on AVGO two weeks prior. Additionally, the number of analysts with price targets above $400 moved from two to three. Clearly, analysts continue to become increasingly bullish on Broadcom shares, with multiple coalescing around targets over $400. Vihn and Lai's targets imply very significant upside in AVGO shares of approximately 22%.

Still, their targets stand in stark contrast to the MarketBeat consensus forecast of around $357. This figure implies only around 3.5% upside in AVGO shares. However, there is a happy medium between these numbers. Among price targets updated after Broadcom’s Sept. 4 earnings release, the average target is $384, implying a solid upside of 11.3%.

Ultimately, this is the best gauge of overall analyst sentiment on Broadcom. It incorporates the company’s most recent financial data and accounts for different interpretations of it. While this level of upside potential isn’t striking, it is encouraging for a large stock that has performed extremely well.

Long-term Potential: Co-Packed Optics May Be Broadcom’s Next Frontier

Price targets can provide perspective on where a stock might go in the near term. However, staying aware of long-term opportunities is just as important. The ability to create long-term growth is one of the reasons it is so difficult to bet against Magnificent Seven stocks. Their massive cash flows allow them to invest in technologies that may not help them today, but could be huge in the future. This helps their share prices keep rising over time, even if certain parts of their business start to decline.

Over the last 12 months, Broadcom generated $25 billion in free cash flow, ranking in the top ten among all U.S. stocks. This clearly gives the firm an outsized ability to invest in emerging growth areas.

One of these areas is co-packaged optics (CPOs). CPOs are a form of semiconductor interconnect; a piece of hardware that connects a chip to a cable. Currently, most semiconductor interconnects are copper-based. This limits bandwidth and cable length, while also requiring more power and cooling. Optical interconnects, which transmit data through light rather than electricity, mitigate these issues. As artificial intelligence (AI) data centers grow larger and more complex, optical interconnects are likely to see a significant increase in demand. It may not take too long for that demand to materialize. CEO Hock Tan believes AI data centers will begin moving to optical interconnects “in a year or two."

Optical interconnects can either be removable pieces of equipment (pluggable) or directly integrated on a chip. Direct integration is what makes the optics "co-packaged." Hock Tan describes CPOs as “a dream" in the sense that they are the ultimate form of semiconductor interconnects. This is because CPOs use 65% less power than pluggable optics, which already offer big improvements over copper. However, optical connections historically have 5% to 8% failure rates. This makes integrating them into a chip highly risky. If the connection fails, one might have to replace an entire $40,000 chip, rather than simply replacing the pluggable interconnect.

However, in a recent test at Meta Platforms NASDAQ: META, Broadcom's CPO technology demonstrated one million link hours without a connectivity disruption. Converge Digest says this test and other data “highlight a turning point for CPO reliability, positioning it as a viable solution for hyperscalers." This is a significant win for Broadcom as it looks to capitalize on the opportunity is CPOs.

Bullish Outlook for AVGO Carries On

Overall, analyst price targets on Broadcom continue to see upside. The company’s opportunities through AI semiconductors and VMware are plentiful. Additionally, evidence suggests that CPO technology could emerge as a new growth driver for Broadcom over the coming years.