Broadcom reported an increase in profit on Thursday, driven by strong sales of its AI products and VMware software. However, management’s guidance for the present quarter upset investors, sending the chipmaker’s shares down nearly 7% within the aftermarket. That’s too harsh a response to otherwise solid numbers. Revenue rose 47% 12 months over 12 months to $13.07 billion, beating analysts’ forecasts of $12.97 billion, in accordance with estimates from LSEG (formerly Refinitiv). Excluding VMWare’s contribution, Broadcom’s revenue rose 4% 12 months over 12 months. Adjusted earnings per share (EPS) rose 18% 12 months over 12 months to $1.24, beating expectations of $1.20. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) got here in at $8.22 billion for the quarter, beating the $7.8 billion Wall Street 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 technique. We view Broadcom as one among the largest AI profiteers through its networking and custom chip businesses. The stock trades at a way 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. Rivals: Marvell Technology, Advanced Micro Devices, and Nvidia Last Buy: Oct 3, 2023 Launch Date: Aug 2, 2024 Bottom Line: Broadcom continues to deliver on our thesis. Its AI-related business continues to grow rapidly, and raising its full-year outlook is further proof that that is top-of-the-line AI chip stories on the market. The VMWare integration can also be going incredibly well, but we never had any doubts as the corporate has a wonderful track record of acquiring strong firms that may generate each revenue and price synergies. The only weakness within the story without delay is in the normal semiconductor business. But CEO Hock Tan said on the conference call that markets overall had bottomed out and were on the road to recovery. When asked through the Q&A session how big the recovery is perhaps, Tan sounded confident that it’ll at the very least return to previous levels. “And like all previous cycles, I feel like we’re going to get back to the level we were at. There’s no reason at all why that shouldn’t happen,” he said of the non-AI semiconductor business. “And given the booking rate… dare I say, just keep in mind that as AI penetrates enterprises, enterprises all the way down to digital natives, you need to improve service. You need to improve storage. You need to improve networking and connectivity across the ecosystem,” Tan explained. Although Tan was hesitant to present a timing for the following upswing, he said it could keep pace with and even exceed previous cycles as a consequence of the storage and workload requirements of AI computing. The investment thesis for Broadcom is unbroken: AI revenues are strong, non-AI semiconductor revenues are mostly bottoming out, and VMWare integration is thrashing all expectations. But with the stock down greater than 6% and trading back near $140 after a seemingly beatable benchmark, Thursday’s sell-off is a chance to purchase incrementally on further weakness. Just leave room within the position in case volatility continues over the following month and a half. We reiterate our rating of 1 and our price goal of $190. Quarterly Commentary Semiconductor solutions revenue rose nearly 5% year-over-year to $7.27 billion, missing expectations, as strength in AI-related sales did not offset ongoing cyclical weakness in enterprise and telco revenues. AI and Non-AI Networking: Total revenue rose 43% year-over-year to $4 billion, driven by about $3.1 billion from sales of AI networking and custom AI accelerators to hyperscaler customers ramping up and scaling up their AI clusters. The revenue split was about one-third networking and two-thirds computing (custom silicon). Broadcom operates an Ethernet network, which is different from Nvidia’s InfiniBand solutions. On the custom chip side, Broadcom said revenue grew 3.5x year-over-year. The company doesn’t name its customers, but 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. Tan expects AI revenue to rise 10% sequentially to over $3.5 billion within the fourth quarter. Traditional semiconductor businesses were weak, perhaps greater than expected given the quarter’s miss. Wireless: Revenue rose 1% 12 months over 12 months to $1.7 billion. In the fourth quarter, Tan said, he expects revenue to rise over 20% quarter over quarter to reflect the launch of a next-generation device by a North American customer. He’s talking, in fact, about Apple ahead of its Sept. 9 event, where the corporate is predicted to unveil its latest AI-powered iPhone. Although Tan maintained his full-year guidance for wireless, which is comparatively flat year-on-year, which may be a conservative assessment, and monetary 2025 is predicted to see strong revenues as Apple is about to embark on a significant latest upgrade cycle. Server and storage connectivity: Revenue fell 25% year-on-year to $861 million. But the recovery Tan had forecast for the second half of the fiscal 12 months is showing, as results improved 5% quarter-on-quarter. That recovery will proceed within the fourth quarter, as Tan expects revenue to grow by a mid- to high-single-digit percentage quarter-on-quarter and decline by a high-single-digit percentage year-on-year. Broadband: Revenue remained pressured as a consequence of a pause in telecom and repair provider spending, falling 49% year-on-year to $557 million. Tan pushed the timeline for hitting the underside from the second half of the fiscal 12 months to early 2025. Industry: This small company’s revenue fell 31% 12 months over 12 months, but Tan said a bottom can have been hit within the third quarter. Broadcom’s other segment, infrastructure software, posted revenue that beat expectations, growing 200% 12 months over 12 months to $5.8 billion. VMware continued its upward trend, posting revenue of $3.8 billion within the quarter, up from $2.7 billion last quarter and $2.1 billion two quarters ago. Even higher: In traditional Broadcom fashion, the corporate is cutting VMWare’s related costs. Operating expenses were $1.3 billion within the quarter, up from $1.6 billion within the second quarter. With revenue rising and costs falling, VMWare’s profitability structure is improving significantly. When Broadcom bought the corporate in November 2023, management set a goal of $8.5 billion in adjusted EBITDA inside three years of the acquisition. Tan moved up that timeline on the earnings call when he said they were on course to fulfill or exceed that goal of their next fiscal 12 months, 2025. Capital Allocation According to the headline figure, Broadcom generated about $4.8 billion in free money flow through the quarter, well below the consensus estimate of about $6.5 billion. However, excluding restructuring and integration costs, Broadcom generated $5.3 billion in free money flow through the quarter. The company paid $1.3 billion in withholding taxes related to the web stock awards that vested through the quarter, leading to the lack of 8.4 million shares. Similar to the previous quarter, there have been no formal share repurchases as a part of the buyback as the corporate is prioritizing debt reduction related to the VMware acquisition. Once Broadcom gets its debt levels back to normal levels, expect strong buybacks. Outlook For the fourth quarter of fiscal 2024, Broadcom expects revenue of about $14 billion, barely below Wall Street’s consensus estimate of $14.1 billion. By segment, semiconductor revenue is predicted to be $8 billion, while infrastructure software revenue is predicted to be about $6 billion. The half-year number is barely below expectations, and the difference is probably going as a consequence of the non-AI business units, as AI sales are humming along. Broadcom raised its full-year AI revenue forecast to $12 billion, up from the previous forecast of over $11 billion. Although Broadcom didn’t provide explicit guidance for fiscal 2025, Tan said on the conference call that he expects strong growth in AI revenue next 12 months. Despite a somewhat weak revenue forecast, profitability looks very strong within the fourth quarter. Management forecast adjusted EBITDA of about 64% of forecast revenue, or $8.96 billion. That beat Wall Street’s estimate of $8.84 billion. Based on the third-quarter results and fourth-quarter guidance, the implied full-year revenue outlook is about $51.5 billion, consistent with the consensus estimate and barely above Broadcom’s previous full-year outlook of $51 billion. (Jim Cramer’s Charitable Trust is long AVGO. 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An indication hangs outside a Broadcom office in San Jose, California.
Justin Sullivan |
Broadcom reported an increase in profit on Thursday, driven by strong sales of its AI products and VMware software, but management’s guidance for the present quarter upset investors and sent the chipmaker’s shares down nearly 7% within the aftermarket, too harsh a response to an otherwise solid result.
