Morgan Stanley has raised its price target on Broadcom to $505, arguing that the chip and software company's artificial intelligence business remains underappreciated by the market. The call comes even after Broadcom's stock fell 6.63% to $342.91, a drop that the bank suggests may reflect high expectations rather than any fundamental weakness.
In a note to clients, Morgan Stanley said Broadcom's most recent quarterly results looked strong and that the stock's valuation still appears reasonable. However, the bank acknowledged that investor enthusiasm for anything tied to AI is already running high, which can limit short-term upside as traders look for ever-bigger surprises.
What's driving the optimism
Broadcom has become a key player in the AI infrastructure boom, supplying custom chips known as XPUs to major cloud and data center operators. These chips are designed for specific AI workloads and are seen as an alternative to the general-purpose GPUs made by Nvidia. Morgan Stanley pointed to Broadcom adding six new XPU customers, a sign that demand is broadening beyond its initial base.
The bank also highlighted Broadcom's ambitious revenue guidance. The company has said it expects to generate $115 billion in AI-related revenue by 2027. That figure has become a point of debate among investors, with some questioning whether it is achievable and others arguing it could prove conservative.
Morgan Stanley appears to side with the latter camp. The bank said it expects Broadcom's AI revenue in the second half of this year to more than triple compared with the same period last year. It also said it would not be surprised if that figure were to double again in 2026, given the pace of customer adoption and the scale of data center buildouts.
Why the stock dropped
Broadcom's recent share price decline, despite the positive outlook, illustrates a broader pattern in the AI trade. After a massive run-up in stocks tied to artificial intelligence, investors have become more selective. Even companies with strong fundamentals can see their shares fall if results or guidance fail to exceed the most optimistic forecasts.
This dynamic is not unique to Broadcom. Across the tech sector, services demand remains hot, but price pressures are building ahead of the next Federal Reserve meeting, which could influence how much investors are willing to pay for growth stocks. Higher interest rates tend to weigh on valuations, especially for companies whose profits are expected far in the future.
What it means for investors
For everyday investors, the key takeaway is that Wall Street analysts still see significant upside in Broadcom's AI business, even after a sharp pullback. The $505 price target implies roughly 47% upside from the current price of $342.91, though it is important to remember that price targets are just one analyst's opinion and can be wrong.
Broadcom's story is part of a larger trend: the buildout of AI infrastructure is still in its early stages, and companies that supply the underlying hardware and software could benefit for years. However, the recent volatility in Broadcom's stock is a reminder that even strong growth stories can be subject to sharp swings when expectations get ahead of reality.
Investors should also consider the broader economic backdrop. Bond yields in the eurozone have eased as energy prices cool, but in the US, the Fed's next move remains uncertain. If rates stay higher for longer, that could pressure high-valuation tech stocks, including Broadcom.
Morgan Stanley's note suggests that the market may be underestimating how quickly Broadcom's AI revenue can grow. The addition of six new XPU customers is a concrete sign that demand is broadening, and the company's 2027 target of $115 billion in AI revenue is now a key metric for investors to watch.
Looking ahead
The debate over Broadcom's AI revenue guidance is likely to continue in the coming quarters. Bulls will point to the accelerating pace of customer wins and the exponential growth in AI computing needs. Bears will argue that competition is intensifying and that some customers may eventually bring chip design in-house.
For now, Morgan Stanley's stance is clear: Broadcom's AI growth is still underrated. Whether the stock reaches that $505 target will depend on the company's ability to execute on its ambitious plans and on the broader market's appetite for AI-related risk.
As always, investors should do their own research and consider how any single stock fits into their overall portfolio. The AI boom has created enormous opportunities, but it has also brought heightened volatility. Staying diversified and focusing on long-term fundamentals remains a prudent approach.
