In the context of the rekindled "AI faith", the chip giant $Broadcom (AVGO.US)$ has also shown good resilience with a strong rebound of over 13% from the sharp decline in early August. Since the beginning of the year, although the stock price has experienced several adjustments, Broadcom still rose by 47%, ranking among the top ten in market cap in the US stock market.

Broadcom will announce its 3Q fiscal year 2024 performance after-market trading on Thursday. The market generally expects Broadcom to achieve revenue of $12.963 billion this quarter, a year-on-year increase of 46.04%; expected EPS of $0.56, a year-on-year decrease of 27.6%. Currently, analysts have a consensus target price of $196.36, which represents a 20% upside from the latest closing price.

The festivities after Broadcom's previous quarterly report are still vividly remembered - a surge of more than 12% on the first day after the report was released. Will this quarter's report bring another surprise to the market?

Revenue from AI business remains the focus

Broadcom's main focus is on providing ASIC chips for large consumer AI platform customers such as Google, Meta, ByteDance, etc. Sales performance in the AI field is undoubtedly the most concerned focus in the new quarterly report. According to the general expectation of Visible Alpha, analysts predict that Broadcom's AI-related sales will reach $3.25 billion, more than triple the same period last year.

The Broadcom management previously projected that the potential market for the company's AI business will reach between $30 billion and $50 billion annually in the next 3-5 years, while the company's target for fiscal year 2024 is only $11 billion.

The management believes that these large consumer AI customers will not slow down their investment in xPU clusters in the next 3-5 years, and the scale will increase from 0.1 million clusters this year to 1 million clusters. Broadcom emphasizes that the most important thing is that there is no sign of demand slowing down before reaching this scale.

Each cluster has a capital expenditure of $40 billion, and Broadcom's services can account for $25 billion in the $40 billion (including computing, networking, excluding electrical utilities), which means that Broadcom's potential market for AI business will reach between $30 billion and $50 billion per year in the next 3-5 years.

Citi analyst Christopher Danely recently reiterated a buy rating on Broadcom and maintained a target price of $175, citing the bright financial prospects of Broadcom and the comprehensive consideration of strategic acquisitions.

Danely expects Broadcom's third quarter to exceed expectations, benefiting from strong sales of AI. In addition, the acquisition of VMware is expected to make a positive contribution to the company's financial performance. Broadcom has raised its AI revenue forecast from $10 billion to $11 billion for the previous quarter, and forecasted that it may exceed $12 billion with the establishment of new relationships with AI customers, further supporting Danely's optimistic expectations.

UBS analyst also pointed out this week that Broadcom's AI-related business unit and the integration of the software company VMware acquired last year are the main drivers of the company's continued growth.

Another major customer? OpenAI may collaborate with Broadcom to develop AI chips.

In February of this year, the news of OpenAI CEO Sam Altman's $7 trillion fundraising to build a chip empire shocked the world. The latest news reveals that OpenAI is in talks with Broadcom and other chip design companies to develop new AI chips.

Citigroup believes that after Tesla and ByteDance, OpenAI will become the fourth largest ASIC (custom chip) customer of Broadcom, and Broadcom is expected to deliver to OpenAI after the second half of 2025.$Alphabet-A (GOOGL.US)$,$Meta Platforms (META.US)$Currently, Google, Meta,

Investors are closely watching whether this quarter's financial report will announce this partnership.

From the overall industry perspective, although AI concept stocks, led by NVIDIA, did not perform as strongly this quarter as in previous quarters, Wall Street still remains bullish on the future development prospects of the AI and semiconductor industries. Citigroup pointed out in a recent report that market investors have overly high expectations for the quarterly performance of technology companies in this field, which has led to some companies' actual results not meeting investors' expectations. This decline in performance is attributed to inventory replenishment speed being lower than expected, as well as the downward risk in the automotive terminal market. It is reported that the automotive terminal market accounts for 14% of semiconductor demand.

However, Citigroup analysts still have a bullish outlook on the semiconductor industry. Positive factors mentioned by the bank include the increasing demand for artificial intelligence products and memory chips in the market.

Despite the weak demand for chips in the automotive and industrial terminal markets, the three largest terminal markets - personal computers, smartphones, and servers - have relatively healthy demand trends. These three markets account for 61% of semiconductor demand.

How has the stock price performed on past earnings days?

According to Market Chameleon, backtesting the performance of Broadcom in the past 12 quarters, the probability of rising on the day of performance release is relatively high, about 75%. The average price change is +/- 4.6%, with a maximum decline of -7% and a maximum increase of +12.3%.

Currently, the implied volatility of Broadcom is +/- 7.5%, indicating that the options market is betting on a single-day price change of 7.5% after the performance announcement. In comparison, the average stock price change after the performance announcement in the previous 4 quarters was +/- 6.8%, indicating that the current options value of the stock is overestimated.

From the skewness of options volatility, the market sentiment towards Broadcom is slightly bearish.

Editor/Emily