Broadcom shares rose greater than 14% in prolonged trading on Wednesday after the chip and software maker reported better-than-expected quarterly results, driven by strong demand for artificial intelligence and VMware. Broadcom also raised its full-year forecast and announced a 10-for-1 stock split. Revenue within the second quarter of fiscal 2024, which ended May 5, rose 43% 12 months over 12 months to $12.5 billion, beating analyst forecasts of $12.06 billion, in line with estimates from LSEG, formerly Refinitiv. Excluding the contribution from VMWare, Broadcom’s revenue rose 12% 12 months over 12 months. Adjusted earnings per share (EPS) rose 6% 12 months over 12 months to $10.96, beating expectations of $10.85. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) got here in at $7.43 billion for the quarter, beating the $7.05 billion Wall Street had forecast. Broadcom Why We Own It: Broadcom is a high-quality semiconductor and software company led by an incredible CEO in Hock Tan, who’s best known for his value-creating M&A method. We view Broadcom as certainly one of the largest AI profiteers through its networking and custom chip businesses. The stock trades at a far more reasonable price-to-earnings multiple in comparison with other chip stocks. The company also follows a shareholder-friendly capital allocation strategy with its dividends and buybacks. Competitors: Marvell Technology, Advanced Micro Devices, and Nvidia Last Buy: Oct 3, 2023 Start Date: Aug 24, 2023 Bottom Line This was a robust quarter for Broadcom, which solidified our thesis on the corporate. Broadcom’s AI-related business has seen continued revenue growth, with management raising its full-year guidance to $11 billion, reinforcing our view that that is among the finest AI chip stocks in the marketplace. While the remainder of the normal semiconductor business continues to struggle, there are hopeful signs of bottoming out in the subsequent few quarters, allowing for a recovery next 12 months. We also proceed to see upside potential in VMware. The progress Broadcom has made so early in the mixing may be very encouraging, but given management’s experience with mergers, we never had any doubts. CEO Hock Tan and his team do an amazing job of finding strong firms to amass that generate each revenue and value synergies (by reducing costs), generating more free money flow that they use to extend dividends, buy back shares, and find more firms to amass. To top all of it off, Broadcom announced a 10-for-1 stock split that can take effect after the market closes on July 12. As we have said before, stock splits shouldn’t matter in theory. But taking a look at how Lam Research, Chipotle, Walmart, and most recently club chipmaker Nvidia have been received with their splits, they clearly cannot hurt. And it’s good that Broadcom desires to make its shares more accessible to investors and employees. As a results of the overbid, raise, and stock split (which has undoubtedly had a positive impact on shares), we’re raising our price goal on Broadcom to $1,900 per share from $1,550. The stock’s price-to-earnings ratio is not as low cost because it once was, but we will justify its growing premium out there through its strong AI-driven revenue prospects, strong margin performance, and commitment to returning money to shareholders. AVGO YTD Mountain Broadcom YTD The stock closed at a record high of just below $1,500 per share on Wednesday and has gained about 34% year-to-date. Based on its current after-hours price, the stock could open at around $1,700 on Wednesday. Quarterly Commentary Semiconductor solutions revenue rose 6% year-over-year to $7.2 billion, beating expectations, as continued strong performance in AI-related sales greater than offset ongoing cyclical weakness in enterprise and telco revenues. Networking: Revenue rose 44% year-over-year to $3.8 billion, accounting for 53% of semiconductor revenue within the quarter. AI spending is the dominant theme here, with networking and custom accelerator revenues up 280% year-over-year to $3.1 billion. CEO Hock Tan noted on the post-earnings call that the corporate is seeing a shift in its revenue mix toward an increasing share of networking because it continues to roll out AI data center clusters. Broadcom operates an Ethernet network that’s different from Nvidia’s InfiniBand solutions. On the custom chip side, Broadcom said its hyperscale customers are accelerating investments to spice up the performance of its data center clusters. While the corporate didn’t name them, club names Alphabet and Meta Platforms — and more recently TikTok parent ByteDance — are widely believed to be the first customers for these custom AI accelerators. Traditional semiconductor businesses were weak, as expected. Wireless: Revenue rose 2% year-over-year to $1.6 billion and accounted for 22% of semiconductor revenue. The company left unchanged its previous forecast of flat year-over-year revenue. However, we consider a brand new upgrade cycle at Apple, its wireless customer, could help drive future revenue gains. Server and storage connectivity: Revenue fell 27% year-over-year to $824 million and accounts for 11% of semiconductor revenue. This business has been brutal for a while, but Tan called this quarter the low point and reiterated his expectation of a recovery within the second half. Tan now forecasts storage revenue to say no about 20% this 12 months, perhaps a bit higher than the mid-20s decline previously expected. Broadband: Revenue fell 39% year-over-year to $730 million, accounting for 10% of segment revenue. Demand here has recovered, and the business is not expected to bottom out until the second half of the 12 months. That pessimistic outlook led management to revise its full-year forecast from just over 30% to a revenue decline of over 30% year-over-year. Industrial: Revenue on this small business fell 10% year-over-year, and management lowered its forecast from a single-digit decline to double-digits. Broadcom’s other business, infrastructure software, also beat expectations, growing 175% year-over-year to $5.3 billion. One vibrant spot was VMware, with revenue of $2.7 billion, up from $2.1 billion within the previous quarter. But that is only the start of the advantages of the VMware deal, as Broadcom expects revenue to speed up to $4 billion per quarter in the longer term. Tan said the mixing of VMware, which the corporate acquired late last 12 months, goes well with the move to a subscription licensing model. And the outcomes bear that out. Not only has there been an acceleration in annualized booking value, but redundant costs have been eliminated, leading to a pleasant uptick in revenue and expenses. Broadcom said VMware expenses were $1.6 billion within the quarter, up from $2.3 billion per quarter before the acquisition. Tan expects that number to drop to $1.3 billion by the top of the fourth quarter, which is above the previous plan of $1.4 billion. He believes it’ll stabilize at $1.2 billion after the mixing. Capital Allocation Overall, Broadcom generated about $4.5 billion in free money flow within the second quarter of fiscal 2024, but that number jumps to $5.3 billion, up 18% 12 months over 12 months, when excluding restructuring and integration within the quarter. This strong money generation allowed Broadcom to spend $1.55 billion on share repurchases to attain tax withholding on the vesting of stock awards, eliminate 1.2 million shares, pay $2.4 billion in dividends, and pay down $2.4 billion in debt. There were no formal common stock repurchases as a part of the repurchase program, but the corporate just accomplished its first fiscal quarter, during which it bought back a whopping $7.1 billion price of shares. Outlook Following a robust first half of fiscal 2024, Broadcom raised each its revenue and adjusted EBITDA outlook. The company now expects revenue of $51 billion, up from $50 billion previously, with adjusted EBITDA of about 61% of forecast revenue, up from 60% previously. That works out to about $31.11 billion. The positively revised update is above FactSet’s estimates of $50.58 billion in revenue and $30 billion in adjusted EBITDA. One reason for the upgrade: Broadcom has a greater outlook for AI revenue, which is able to now total over $11 billion this 12 months, up from the previous forecast of about $10 billion. This still seems conservative to us. (Jim Cramer’s Charitable Trust is long AVGO, NVDA, GOOGL, META. A full list of stocks could be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. After sending a trade alert, Jim waits 45 minutes before buying or selling a stock from his charitable foundation’s portfolio. When Jim has discussed a stock on CNBC, he waits 72 hours after the trade alert is issued before executing the trade. THE INFORMATION REGARDING INVESTING CLUB SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR OBLIGATION IS PROVIDED BY OR CREATED BY RECEIVING INFORMATION RELATED TO INVESTING CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
Hock Tan, CEO of Broadcom
LucasJackson | Reuters
Broadcom Shares rose greater than 14% in prolonged trading on Wednesday after the chip and software maker reported better-than-expected quarterly results, driven by strong demand for artificial intelligence and VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split.
