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Why Broadcom Stock Rallied Tuesday Morning
Key Points
Broadcom stock was upgraded in the lead-up to Anthropic's IPO.
The company reportedly helped secure financing for a major chip deal in a classic win-win.
Broadcom stock remains reasonably priced.
Shares of Broadcom (NASDAQ:AVGO) gained ground on Tuesday, climbing as much as 5%. As of 11:20 a.m. ET, the stock was still up 3.5%.
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The catalyst that sent the semiconductor specialist higher was an upgrade and excitement surrounding the upcoming IPO of Anthropic.
Image source: Getty Images.
A helping hand
DA Davidson analyst Gil Luria upgraded Broadcom to buy while simultaneously raising his price target to $400 from $350. For those keeping score at home, that represents potential upside of 22% compared to Monday's closing price.
After perusing Anthropic's regulatory filing ahead of its highly anticipated IPO, the analyst found reason to be bullish about the overall adoption of artificial intelligence (AI). The analyst noted that Broadcom is both a supplier and lessor to the AI start-up, with a non-cancelable five-year lease. The company has also deposited funds with Broadcom to secure compute capacity. These factors not only bode well for the future adoption of AI, but also provide visibility into a good chunk of Broadcom's future AI chip business.
There's more. A report from The Wall Street Journal suggests that Broadcom CEO Hock Tan lobbied banks and private equity firms to help Anthropic secure $63 billion in financing for the specialized tensor processing units (TPUs) Broadcom is developing in partnership with Alphabet's Google. Moreover, by raising the necessary funds, Anthropic is helping ensure its IPO proceeds, with some of the funds going to Broadcom for the aforementioned chip leases.
At 29 times forward earnings and 17 times next year's expected earnings, Broadcom might appear pricey. However, its price/earnings-to-growth (PEG) ratio clocks in at 0.43, where any number less than 1 signifies an undervalued stock. That, coupled with the company's triple-digit growth, helps underscore why Broadcom is reasonably priced.
Danny Vena, CPA has positions in Alphabet and Broadcom. The Motley Fool has positions in and recommends Alphabet and Broadcom. The Motley Fool has a disclosure policy.