Is Broadcom Inc. (AVGO) the Best Automation Stock to Buy Now?
We recently published a list of 10 Best Automation Stocks to Buy Now. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other automation stocks.
2023 was the year of generative AI, mainly because of the widespread adoption of ChatGPT and the resulting response that followed. Now, 2024 is the year in which companies have truly started using this ever-evolving technology. McKinsey revealed that AI supported the companies in both aspects: cost decreases and revenue jumps.
Automation Technologies- Key Trends
In 2024, the integration of automation technologies continues to revolutionize every aspect of supply chain management. This led to unprecedented levels of efficiency and agility. The global integrated automated supply chain is expected to reach US$25.6 billion by 2033, from US$13.4 billion in 2023, according to industry data by Market.us.
From removing warehousing bottlenecks to inventory management and demand forecasting, supply chain automation reshaped traditional practices and redefined the dynamics of the logistics industry. In inventory tracking, advanced warehouse management systems, which are powered by AI and ML algorithms, focus on optimizing inventory placement, route planning, resource allocation, etc.
Inventory tracking and management are being revolutionized through the usage of automation solutions, such as RFID tagging, barcode scanning, and computer vision. Real-time tracking technologies are offering granular visibility in inventory movements. This allows businesses to monitor stock levels, spot discrepancies, and manage understocking/overstocking. Manufacturers are now getting inclined towards smart factories.
Smart factories reflect and demonstrate Industry 4.0 principles. They tend to leverage 5G, IoT, AI, and other advanced technologies. Experts believe that smart factories allow predictive maintenance and decision-making.
Adoption of Advanced Automation
A new theme is emerging in the field of automation, which is automated decision-making. Its adoption rapidly expanded beyond traditional sectors such as manufacturing and logistics. Demand for decision intelligence stems from data-driven and well-informed decision-making requirements which enhances corporate competitiveness and efficiency.
Automated decision-making is now being accepted by critical domains including healthcare and finance. In healthcare, automation supplements the clinical decision-making processes, improves patient-care delivery, and manages resource allocation. It involves leveraging AI and ML algorithms to assess patient data, medical images, and genomic sequences, and customize patient care.
Likewise, in finance, automated systems continue to reshape top-notch operations like risk assessment, fraud detection, and investment management. AI algorithms assess large datasets of financial transactions and market trends to optimize investment strategies. In 2024, the software development industry is all set to embark on a remarkable transformation with cutting-edge innovations.
Quantum Computing and Robotics
The latest technologies in software that are expected to reshape the landscape include quantum computing, virtual reality (VR), augmented reality (AR), big data, data analytics, 5G technology, robotics, etc.
Quantum computing continues to rapidly advance, evolve, and reshape scientific and industrial landscapes. Unlike classical computers—which use bits as the smallest information unit—quantum computers make use of qubits. These exploit quantum mechanics principles to perform complex and difficult calculations. For example, at the time of drug discovery, quantum algorithms simulate molecular interactions in a more accurate and refined way as compared to traditional methods. The integration of quantum computing with AI is another critical emerging trend.
The unprecedented advancements in robotics and AI are expected to bring revolutionary positive transformations. More and more sectors continue to understand the benefits of adopting robotics and AI. Globally, the robotics market should achieve healthy revenue growth, with a projected value of US$38.24 billion this year. The strongest segment in the robotics market is expected to be service robotics, which should lead in market volume. Service robotics find its application in sectors, like Healthcare, Medical, Military and Defense, Logistics, etc. while industrial robots are used in Automotive, Electronics, Food & Beverage, etc.
The trends driving the robotics market are supported by developments in emerging technologies. These include 5G, AI, Edge Computing, IIoT, cloud, open-source, etc. Since AI in robotics continues to evolve, more and more industries are exploiting the latest technologies. Therefore, manufacturers are making data-driven decisions. Some industries use self-learning robots to execute work processes.
Smart factories are using AI-enabled robotics to execute smarter, reliable, and efficient processes. They help in production optimization. AI-powered robotic technologies, which include computer vision and tactile sensing, are utilized to help automate certain tasks. For example, reinforcement learning is used for better industrial assembly. The adoption of robotics, smart automation, and high-tech manufacturing will help workers with manual labor and reduce repetitive tasks.
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A technician working at a magnified microscope, developing a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
Average Upside Potential: 34.90%
Broadcom Inc. (NASDAQ:AVGO) develops connected devices and Internet infrastructure, ranging from physical optic fiber to antennas, semiconductors, and software. The company remains active across the infrastructural, industrial, and enterprise-level connectivity sectors.
Therefore, it has a presence at every level of IoT, from homes or factories to data centers. Ever since the company has acquired VMware, Broadcom Inc. (NASDAQ:AVGO) solidified its position as the market leader in the hybrid cloud management space. VMware is joining SEW-EURODRIVE, who is the a leader in drive automation solutions, to lead the transition to new era of software-defined manufacturing with SEW-EURODRIVE’s DriveOperations concept. This concept focuses on enhancing operational capabilities, reducing costs, and managing complex tasks more effectively.
The company, known for its diverse technological services and acquisition strategy, expects to see an increase in chip demand, courtesy of the ever-evolving field of generative AI. Given its recent acquisition of VMware, it has strengthened its product offerings. This is true mainly for custom and networking chips, which should see healthy growth because of AI advancements.
Wall Street analysts applauded the dominant position of the company in critical chip markets. These analysts are optimistic about the potential of VMware’s subscription-based growth. The stock of Broadcom Inc. (NASDAQ:AVGO) has seen a run-up of over ~70% in 1 year, thanks to a robust AI growth environment and integration of VMware. The stock now trades at ~24.63x its forward earnings, which is still at a discount to the sectoral average of ~32.2x.
The company released its 2Q 2024 results, where revenues came at $12,487 million, showcasing an increase of ~43% YoY. Its GAAP net income came in at $2,121 million and its non-GAAP net income was $5,394 million. Much of this improvement was driven by AI demand and VMware. The revenue from its AI products was $3.1 billion in 2Q 2024, a record for Broadcom Inc. (NASDAQ:AVGO). The infrastructure software revenue picked up pace as more enterprises adopted the VMware software stack so that they could build their private clouds.
Wells Fargo & Company raised its price objective on the shares of Broadcom Inc. (NASDAQ:AVGO) from $143.00 to $170.00, giving an “Equal-weight” rating on 13th June. It was held by 115 hedge funds in Q1 2024, with total stakes worth $14.7 billion.
Aristotle Atlantic Partners, LLC, an investment advisor, released its second quarter 2024 investor letter. Here is what the fund said:
“Broadcom Inc. (NASDAQ:AVGO) is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. The company strategically focuses its research and development resources to address niche opportunities in target markets and leverage its extensive portfolio of U.S. and other patents and other intellectual property to integrate multiple technologies and create system-on-chip component and software solutions that target growth opportunities. Broadcom designs products and software that deliver high performance and provide mission-critical functionality. The company has a history of innovation in the semiconductor industry and offers thousands of products that are used in end products such as enterprise and data center networking, home connectivity, “set-top boxes broadband access”, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets where it believes it can earn attractive margins.
We view Broadcom’s semiconductor business as being very well positioned to benefit from secular growth in data center networking, which is being driven by AI and cloud computing. The company continues to invest in research and development, and we see this as a competitive advantage for the company. Broadcom’s infrastructure software business is a recurring revenue business model that provides mission-critical mainframe support software to its customer base. The recent VMware acquisition will enhance this business strategy and accelerate the growth rate of this business unit, as VMware’s product suite includes key tools for AI server upgrades. Our long-term investment thesis is supported by Broadcom’s success in its strategy of maintaining technology and market share leadership in mission-critical markets with high switching costs and deep profit pools.”
Overall, AVGO ranks 4th on our list of best automation stocks to buy. While we acknowledge the potential of AVGO as an investment, 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.