Broadcom shares rose Thursday after the chipmaker showed strong fourth-quarter profitability and provided a slew of upbeat updates about its artificial intelligence business — a combination so good that investors looked past a slight sales loss. Revenue in the fourth quarter of fiscal 2024 rose 51% year over year to $14.05 billion, falling short of analysts' expectations of $14.09 billion, according to estimates compiled by LSEG. Excluding VMWare's contribution, Broadcom's organic sales rose 11% year over year. Adjusted earnings per share (EPS) increased 28% year-over-year to $1.42, beating expectations of $1.38, LSEG data showed. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $9.09 billion in the quarter, beating consensus estimates of $8.97 billion on Wall Street, according to FactSet. With shares up nearly 17% in premarket trading on Friday, Broadcom is on track to open the regular session at a new all-time high above $200 apiece. The stock's current record close was set at $185.95 on October 9. AVGO YTD Mountain Broadcom stock has moved year to date. Bottom Line The headline numbers for the August-October quarter may have been mixed, but make no mistake, this was a very strong report. However, you won't understand how powerful it is unless you listen to the earnings call. This is the latest example in support of Jim Cramer's long-standing investing principle that investors need to wait for the call before making a post-earnings trade. Certainly, Broadcom shares initially traded on release thanks to an earnings boost fueled by strong results for both gross and operating margin. However, the real move came during the call when CEO Hock Tan discussed Broadcom's custom AI chip business, which currently serves three unmentioned “hypervolume” customers and is key to our investment thesis. These clients are widely believed to be club names Alphabet and Meta Platforms — and, more recently, ByteDance, the parent company of TikTok. In addition to strong demand from these three customers, Tan said Broadcom is now developing advanced AI chips with “a couple of additional hyperscalers,” with the hope of turning them into revenue-generating customers before 2027. Tan's revelation came just one day after From a report by The Information. That Apple club was working with Broadcom on a chip specifically for data centers. Given this report, it makes sense that Apple would be one of these new customers. While Broadcom adheres to the No. 1 rule of working with Apple — never mention Apple — the two California-based companies are already working together on chips for the iPhone (more on that later). Broadcom (AVGO) Why We Own It: Broadcom is a high-quality software and semiconductor company run by a brilliant CEO in Hock Tan, who is known for his value-creating M&A strategy. We see Broadcom as one of the biggest beneficiaries of AI through its networking and custom chip businesses. The stock is trading at a more reasonable price-to-earnings ratio compared to other chip stocks. The company also has a shareholder-friendly capital allocation strategy through dividends and buybacks. Competitors: Marvell Technology, Advanced Micro Devices, Nvidia Last Purchased: October 3, 2023 Start Date: August 24, 2023 Tan also gave a rosy forecast for where Broadcom's entire AI business could take off, even before factoring in the new allocation. segment customers. Another part of Broadcom's AI business is related to sales of networking chips, which are effectively part of the “plumbing” for a data center and help different parts communicate as a larger computing factory. Tan estimated that Broadcom's serviceable market, or SAM, for AI will be about $60 billion to $90 billion by fiscal 2027. At the same time, Tan noted that this may be conservative because these additional customers will likely increase the AI SAM.” Significantly, if these projects develop as expected. Nearly a year after closing, Broadcom's acquisition of VMware is progressing well, with the software provider's business showing improved bookings and lower operating costs. On the call, Tan said that since completing the deal, Broadcom has been able to enroll more than 4,500 of its 10,000 largest customers into VMware Cloud Foundation, which the CEO described as “the complete software stack that virtualizes the entire data center.” Elsewhere, Broadcom didn't make the buyback announcement we were hoping for, but management assured investors that the company is instead using its cash flow to seriously reduce its debt load. That's an acceptable trade-off, as far as we're concerned, because the VMWare acquisition required Broadcom to use financing. Put it all together – strong results, positive outlook for the current quarter, and especially the two new customers for our custom AI chip business – and we are increasing our price target on the stock to $230 per share from $190. We are also reiterating our rating equivalent to Buy 1, but it is important to note that our approach generally does not chase huge stock moves as seen in after-hours trading on Thursday. Quarterly Commentary Semiconductor Solutions revenue rose more than 12% year over year to $8.23 billion, beating expectations, according to FactSet. Networks: Total revenue increased 45% year-over-year to $4.5 billion, exceeding $4.3 billion expected. Tan said 76% of sales came from AI networking solutions, which were up about 158% year-on-year. “This was driven by a doubling of our AI export shipments to our three hyperscale customers, and a quadrupling of growth in AI connectivity revenues, driven by Tomahawk and Jericho shipments globally,” Tan said on the call. Tomahawk and Jericho are products within Broadcom's data center “plumbing” business. Turning to the legacy semiconductor business: Wireless Communications: Revenue increased 7% year-over-year to $2.2 billion, beating consensus estimates of $1.96 billion, driven by higher content in customer devices. The result also represents a sequential increase of 30% — which isn't a complete surprise, given that the quarter historically coincides with the launch of the latest iPhone each year. Apple is understood to be the “North American customer” that Broadcom refers to when discussing its wireless business. Tan's comments on the call made it clear that he is aware of investors' growing concern about Apple potentially moving some SIM production in-house. “We remain very engaged with this customer on multi-year roadmaps across different technologies,” Tan said, and we hope this will allay some of these concerns, at least in the short term. Apple's long-term moves are difficult to predict, but the potential for Apple to use Broadcom's custom chip solutions is important context moving forward. The revenue recognition spot may move a little over time, but this doesn't appear to be the end of this relationship by any means, and selling Broadcom stock on these concerns would likely be short-sighted. Server Connectivity and Storage: Sales were $992 million, which Tan noted was a roughly 20% rebound from the trough seen six months ago. This is better than the expected $915 million. Broadband: Sales fell 51% year over year to $465 million, well below the expected $550 million. To be sure, Tan said he believes this sub-sector has “hit bottom,” adding: “We saw significant orders across many providers during this quarter, and reflecting this trend, we now expect broadband to show a recovery from Q1.” Industry: Sales fell 27% year over year to $173 million, below the expected $187 million. This subsector represents only about 1% of the company's total revenue, so its results don't matter much at all to the overall investment story. In terms of infrastructure software, Broadcom posted weaker-than-expected revenue of $5.82 billion, but its massive VMWare acquisition, which closed just over a year ago, led to a roughly 200% year-over-year increase. VMware continues to show strong momentum, with Tan noting that annual booking value increased to $2.7 billion in the fourth quarter, compared to $2.5 billion in the previous quarter. “VMware integration is largely complete,” he said on the call. He continued: “Revenues are on a growth path, and operating margin reached 70% by the end of 2024. We are on track to achieve adjusted EBITDA at a level that significantly exceeds the $8.5 billion we reported when we announced the deal.” . “We plan to achieve this much earlier than our initial goal of three years.” VMware-related costs in the quarter were $1.2 billion, down from $1.3 billion in the third quarter and $1.6 billion in the second quarter, Tan said. By comparison, at the time of the Broadcom acquisition, Tan said VMware's average value was about $2.4 billion. This sharp decline is a reflection of Broadcom's takeover rules – at the highest level, it is about buying high-quality companies and materially improving their profitability. Outlook For the first quarter of fiscal 2025, Broadcom expects revenue to be about $14.6 billion, essentially on par with the Street's estimate of $14.57 billion, according to LSEG. By sector, semiconductor revenue is expected to be $8.1 billion, representing a slight loss versus expectations of $8.27 billion. Meanwhile, infrastructure software sales are expected to reach about $6.5 billion, ahead of the $6.28 billion the Street was looking for. In the Semiconductor Guide, management noted that AI revenues are expected to grow 65% year-over-year to approximately $3.8 billion. While sales expectations were consistent, first-quarter profitability looks very strong. Management guided adjusted EBITDA at approximately 66% of expected revenue, or $9.636 billion, beating Street estimates of $9.234 billion, according to FactSet. (Jim Cramer's Charitable Trust is AVGO, GOOGL, AAPL, and META. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. 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A banner hangs in front of Broadcom's office in San Jose, California, on June 3, 2021.
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Broadcom shares rose Thursday after the chipmaker showed strong fourth-quarter profitability and provided a slew of upbeat updates about its artificial intelligence business — a combination so good that investors looked past a slight sales loss.
