We recently published a list of Top 10 Buzzing AI Stocks Now. Since Broadcom Inc (NASDAQ:AVGO) ranks 5th on the list, it deserves a deeper look.

Following the aggressive rate cut by the Federal Reserve, the market roared to new highs but quickly lost enthusiasm as investors look for clues on what might be ailing the economy that pushed the Fed to go more dovish than expected. However, others think the bull market is going to continue.

BMO Capital’s Brian Belsk has raised the S&P 500 target for 2024 to 6,100 from 5,600. Talking to CNBC in a latest program, Belsk said the “resiliency” of this bull market is “undoubted.”

The analyst said that the stock market is going higher through the end of this year.

“We do believe that the Fed is doing a great job. We believe the Fed that we are not hitting into a recession. We believe the Fed that we are heading into more of a soft landing,” the analyst said.

Belsk thinks we are in the “1995-1996 environment” where we can “handle” the 24x earnings multiple.

The analyst added that the Mag. 7 stocks underperformed the market in the third quarter and yet the broader market grew, which shows the market rally is broad.

For this article we chose 10 AI stocks trending on the back of latest news, earnings and analyst ratings. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Broadcom Inc (NASDAQ:AVGO)

Number of Hedge Fund Investors: 130

Jordan Klein, TMT desk analyst at Mizuho Americas, while talking to CNBC earlier this month, said that high expectations weighed on Broadcom shares despite the company posting a strong quarter.

The analyst, while commenting on Broadcom’s Q4 revenue guidance, said:

“In semis especially if you are probably the second most owned name in the sector after Nvidia, you can’t miss the top-line even though you raise your AI number.”

Klein said that one of the reasons why he “loves” owning Broadcom Inc (NASDAQ:AVGO) is that it offers diversification beyond Nvidia since over $250 billion hyperscaling AI spending would not just go to Nvidia.

“So I think going forward it’s going to be spread to areas that are in Broadcom’s wheelhouse – optical, connectivity, networking, and these customer ASIC chips that are going to be built by these Cloud companies to do inference and that’s where they are going to win.”

Broadcom Inc (NASDAQ:AVGO) recently posted quarterly results and while they beat estimates on both EPS and revenue, guidance failed to impress the Street, resulting in a share price decline. However, Jefferies said the dip was a buying opportunity.

“Guidance came in a bit lighter than expected, but management has been messaging lumpiness in AI revenue and growth is set to reaccelerate in 4Q,” said Jefferies analyst Blayne Curtis, in a note. “The cyclical correction in non-AI revenue is in-line with peers, and our view is the long-term trend in AI still favors an industry shift to custom ASICs, where Broadcom Inc (NASDAQ:AVGO) remains well-positioned. Factor in the added benefit of the VMware acquisition running ahead of schedule on both revenue and earnings, and it’s easy to look past one minor bump in the road.”

Broadcom Inc (NASDAQ:AVGO) continues to be a leader in the AI ASCI and networking chips market. The company expects about $12 billion in AI revenue in fiscal 2024, which means 20% of its total revenue will come from AI and counting.

Broadcom Inc (NASDAQ:AVGO) has 3nm AI ASIC chip deals with Alphabet and Meta in addition to many other tech giants aiming massive spending for AI hyperscaling.

The company’s Ethernet business is also strong amid partnerships with Arista Networks (ANET), while the company is also collaborating with Dell (DELL), Juniper (JNPR), and Super Micro (SMCI) in the networking business and other segments.

Mar Vista Focus strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter:

“During the quarter, we established new investments in Broadcom Inc. (NASDAQ:AVGO) and Meta Platforms. We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission critical products that generate industry leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions.

Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories.

Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated.”

Overall, Broadcom Inc (NASDAQ:AVGO) ranks 5th on Insider Monkey’s list titled Top 10 Buzzing AI Stocks Now. While we acknowledge the potential of Broadcom Inc (NASDAQ:AVGO), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.