Morgan Stanley Adds Broadcom to Portfolio on AI Strength, Drops Eaton on Valuation

Morgan Stanley Portfolio Solutions has added semiconductor and software firm Broadcom Inc. (AVGO) to its holdings, citing the company's strong position in the artificial intelligence sector. The firm simultaneously removed power management company Eaton Corp. plc (ETN) due to valuation concerns.

Broadcom's AI-Driven Appeal

Morgan Stanley said the move provides diversified exposure to what it sees as a multi-year trend in AI infrastructure spending. The firm described Broadcom as a technology leader in custom AI chips, data-center networking, and infrastructure software through its VMware acquisition.

The investment bank highlighted Broadcom's financial performance and valuation, noting the stock trades at approximately 20 times forward earnings per share. According to the firm, Broadcom's key metrics include:

• Trailing-twelve month (TTM) revenue: ~$75.5 billion
• TTM AI semiconductor revenue: ~$30.8 billion
• TTM adjusted operating income: $50.1 billion
• TTM adjusted operating margin: ~66.4%

Morgan Stanley pointed to Broadcom's established programs with major hyperscalers like Google and newer engagements with Meta, OpenAI, and Anthropic. The firm also sees the VMware business as a source of stable, high-margin recurring cash flow that reduces the earnings cyclicality typical of semiconductor companies.

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Eaton Removed on Valuation Concerns

The decision to remove Eaton was driven primarily by its valuation, which Morgan Stanley noted is approximately 26 times its estimated fiscal year 2027 earnings per share. The firm believes this price already reflects strong future growth in data-center demand and its Electrical Americas segment.

Recent performance also played a role, as the firm cited that Eaton's Electrical Americas margins had fallen short of expectations and that management had reduced its second-quarter guidance. Morgan Stanley added that its portfolio retains direct exposure to AI data-center power demand through its holding in Bloom Energy.

Potential Headwinds

Morgan Stanley also acknowledged potential risks to its Broadcom investment. These include a possible slowdown in AI capital spending by major cloud providers, increased competition from rivals like MediaTek or Nvidia, and any shortfalls in the integration of VMware or the recovery of its non-AI semiconductor businesses.