Broadcom accelerated AI powered by Nvidia chips. Citi expects its stock to rise 10%

Citi Research expects shares of chipmaker Broadcom to rise 10%. The company unveiled a new switch for Nvidia AI chips that significantly speeds up data exchange between processors connected to the same network. This will improve the performance of server systems, so large companies have already started ordering upgrades. Broadcom shares, which are already up 70% over the past two months, hit an all-time high on Tuesday.

Citi analyst Christopher Danely on June 3 raised his target price on Broadcom shares to $276 from $210, up 11% from the previous close price. Daneli also reiterated a «buy» recommendation on Broadcom shares, citing strong demand for AI chips. The company will release its quarterly report on Thursday, and the analyst expects good results.

«We expect Broadcom to report better than consensus due to continued growth in AI demand,» Daneli wrote in a note quoted by Barron's. Despite the growth in the AI space, Broadcom's semiconductor sales outside the AI segment are still about 40 percent below their early fiscal 2023 peaks, but analyst Citi forecasts a rebound.

Broadcom's stock has been declining since the beginning of the year, but after hitting bottom two months ago, it has already risen more than 70%. In trading on June 3, the stock rose more than 3.5%, reaching a new all-time high;

The company on June 3 announced the shipment of next-generation Tomahawk 6 Ethernet switches designed to handle AI clusters combining 10 Nvidia chips each. The first shipments will go to major customers, which the company did not name. The switches will go on sale in July at an estimated price of about $20,000. This is twice the price of the previous generation device, but it is six times slower than the new one, Broadcom said.

As AI tasks become more complex and AI models grow in size, data center providers and researchers are combining tens and sometimes hundreds of thousands of AI chips into supercomputer clusters. To transfer data between these chips, a reliable and fast network is critical.

Nvidia's AI chips typically run at only 30-40% of their capacity, explains Broadcom Core Switching Group head Ram Velaga in a press release, «because they have to wait for the network to transmit data.» Broadcom estimates that with Tomahawk 6, customers will be able to complete tasks faster without having to buy new Nvidia chips.

«Broadcom has dominated the premium Ethernet chip segment for decades. It would be surprising if it wasn't the best product on the market,» announced Daneli in a commentary for Barron's.

Citi isn't the only optimist on Wall Street. Last week, Ben Reitzes of Melius Research raised his target price on Broadcom shares from $198 to $283 and reiterated a Buy rating. In the note, he emphasized the long-term revenue growth prospects for AI chips, even though Broadcom remains the second player in the market after Nvidia.

Overall, according to FactSet, 16 analysts have reiterated a «Buy» recommendation on Broadcom shares over the past month. According to data from MarketWatch, the chipmaker has a total of 31 Buy recommendations and eight Overweight ratings. Another five recommend holding the chipmaker's stock in their portfolios (Hold). The Wall Street consensus price target is $252, just below the current value of Broadcom's securities.