Why Broadcom Stock Rallied Tuesday Morning

On Tuesday morning, Broadcom's stock experienced a significant rally, climbing up to 5% and reaching a 3.5% increase as of 11:20 a.m. ET. The driving force behind this surge was an upgrade by DA Davidson analyst Gil Luria, who rated Broadcom as a "buy" and raised his price target from $350 to $400, suggesting a potential upside of 22% from Monday's closing price.

Luria's bullish outlook was primarily fueled by Anthropic's upcoming IPO and the company's strategic partnership with Broadcom. Anthropic is expected to adopt AI technology, and Broadcom is not only a supplier and lessor to this AI startup but also has a non-cancelable five-year lease in place. Furthermore, Anthropic has deposited funds with Broadcom to secure compute capacity, providing a clear indication of the company's future AI chip business.

Beyond this, a report from The Wall Street Journal revealed that Broadcom CEO Hock Tan actively lobbied banks and private equity firms to assist Anthropic in securing $63 billion in financing for the AI-focused tensor processing units (TPUs) they are developing in collaboration with Alphabet's Google. This financial backing is expected to aid Anthropic in its highly anticipated IPO, with a portion of the proceeds earmarked for Broadcom to fund the aforementioned chip leases.

Despite its current valuation of 29 times forward earnings and 17 times next year's expected earnings, Broadcom's price/earnings-to-growth (PEG) ratio of 0.43 suggests that the stock may be undervalued. This, combined with the company's triple-digit growth prospects, further solidifies Broadcom's appeal as a reasonably priced investment.