Broadcom reported better-than-expected earnings on Thursday, driven by strong sales of its artificial intelligence products and VMware software. But management’s guidance for the current quarter disappointed investors, sending the chipmaker’s shares down about 7% in the aftermarket. That’s a pretty harsh reaction to an otherwise strong print. Revenue rose 47% year over year to $13.07 billion, beating analysts’ expectations of $12.97 billion, according to estimates compiled by LSEG, formerly known as Refinitiv. Excluding the contribution from VMWare, Broadcom’s sales rose 4% year over year. Adjusted earnings per share (EPS) grew 18% from a year ago to $1.24, beating expectations of $1.20. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $8.22 billion in the quarter, beating the $7.8 billion Wall Street had forecast. Broadcom Why we own it: Broadcom is a high-quality semiconductor and software company led by an impressive CEO, Hock Tan, who is known for his value-creating M&A strategy. We view Broadcom as one of the biggest beneficiaries of AI through its networking and custom chip businesses. The stock trades at a much more reasonable price-to-earnings ratio than other chip stocks. The company also has a shareholder-friendly capital allocation strategy through its dividends and buybacks. Competitors: Marvell Technology, Advanced Micro Devices, Nvidia Last acquired: October 3, 2023 Started: August 2, 2024 Bottom line Broadcom continues to deliver on our thesis. Its AI business continues to grow at a rapid pace and the increase in its full-year outlook proves that this is one of the best AI chip stories on the market. The VMWare integration is also performing incredibly well, but we never had any doubts because the company has a track record of acquiring strong businesses that can generate both revenue and cost synergies. The only weakness in the story right now is in the traditional semiconductor business. But CEO Hock Tan said on the earnings call that its overall markets have bottomed out and are on their way to recovery. When asked how big the recovery will be during the Q&A, Tan seemed confident that it would at least return to previous levels. “And like all previous cycles, my feeling … is that we will return to the level we used to. There’s absolutely no reason why that won’t happen,” he said of the non-AI semiconductor business. “And given the booking rate … I dare say, even put in your mind that as AI becomes more prevalent in enterprises and businesses across the digital natives, you need to upgrade service. You need to upgrade storage. You need to upgrade networking and connectivity across the entire ecosystem,” Tan explained. While Tan was hesitant to offer a timing for the next upcycle, he said it could meet or even exceed previous cycles due to the storage needs and workload of AI computing. Broadcom’s investment thesis is sound: AI revenues are strong, semi-AI revenues are mostly patchy, and VMWare integration is beating expectations. But with the stock down more than 6% and trading back in the low $140s after what appears to be a bullish lead, Thursday’s selloff is an opportunity to gradually buy into any additional weakness. Just leave room in the position if volatility persists over the next month and a half. We reiterate our #1 rating and $190 price target. Quarterly Commentary Semiconductor solutions revenues grew about 5% year over year to $7.27 billion, missing expectations, as strength in AI-related sales failed to offset continued cyclical revenue weakness from enterprise and telcos. AI and non-AI networking: Total revenues rose 43% year over year to $4 billion, driven by about $3.1 billion in sales of AI networking and AI accelerators for large enterprise customers scaling and scaling their AI stacks. The revenue split was about one-third networking and two-thirds compute (custom silicon). Broadcom runs Ethernet, which is different from Nvidia’s InfiniBand solutions. On the custom chip side, Broadcom said sales grew 3.5x year-over-year. The company doesn’t name its customers, but Club Alphabet and Meta Platforms — and, more recently, TikTok parent ByteDance — are widely believed to be the main customers for these custom AI accelerators. Tan sees AI revenue growing 10% sequentially to more than $3.5 billion in the fourth quarter. The traditional semiconductor business was weak, perhaps more than expected given the quarter’s failure. Wireless: Revenue rose 1% year-over-year to $1.7 billion. In the fourth quarter, Tan said he expects revenue to rise more than 20% sequentially to reflect the launch of a next-generation device from a North American customer. He’s talking, of course, about Apple ahead of its Sept. 9 event, when the company is expected to unveil a new AI-powered iPhone. While Tan didn’t budge on his full-year wireless forecast, which is relatively flat year-over-year, that may be a conservative decision and fiscal 2025 sales will be strong as Apple is about to embark on a major new upgrade cycle. Server and storage connectivity: Sales were down 25% year-over-year to $861 million. But the recovery Tan called for starting in the second half of his fiscal year is fading, with results improving 5% quarter-over-quarter. That recovery will continue in the fourth quarter, with Tan expecting revenue to grow by mid-to-high single-digit percentages sequentially and decline by high single-digit percentages year-over-year. Broadband: Sales remained under pressure due to a halt in spending by carriers and service providers, down 49% year-over-year to $557 million. Tan pushed back the timeline for a bottom to early 2025 from the second half of his fiscal year. Industrials: Sales were down 31% year-over-year for this small company, but Tan said it may have bottomed out in the third quarter. Broadcom’s other infrastructure segment, Infrastructure Software, beat expectations in revenue, growing 200% year over year to $5.8 billion. VMware continued its improving trend, with revenue of $3.8 billion in the quarter, up from $2.7 billion in the previous quarter and $2.1 billion two quarters ago. Better yet, in typical Broadcom fashion, the company is cutting costs associated with VMWare. Operating expenses in the quarter were $1.3 billion, down from $1.6 billion in the second quarter. With revenue growth and lower expenses, VMWare’s profitability profile is improving significantly. When Broadcom first bought the company in November 2023, management set a target of $8.5 billion in adjusted EBITDA within three years of the acquisition. Tan moved that timeline forward on the earnings call when he said he was on track to meet or exceed that target in the upcoming fiscal year 2025. Capital Allocation In the headline, Broadcom generated about $4.8 billion in free cash flow in the quarter, a big miss from the consensus estimate of about $6.5 billion. However, Broadcom generated $5.3 billion in free cash flow when excluding cash restructuring and integration costs in the quarter. The company paid $1.3 billion in withholding taxes related to net stable stock awards that were granted in the quarter, canceling 8.4 million shares. Similar to the previous quarter, there were no formal share repurchases in the quarter as part of the buyback as the company prioritizes reducing debt related to the VMware acquisition. Once Broadcom normalizes its debt levels, expect a massive buyback. Broadcom expects revenue of about $14 billion in the fourth quarter of fiscal 2024, slightly below the Street consensus estimate of $14.1 billion. By sector, semiconductor revenue is expected to come in at $8 billion while infrastructure software sales are expected to come in at around $6 billion. The semiconductor number is slightly below expectations, and the difference is likely due to non-AI business lines as AI sales are booming. Broadcom raised its full-year AI revenue forecast to $12 billion, up from previous guidance of more than $11 billion. Although Broadcom did not provide explicit guidance for fiscal 2025, Tan said on the call that he expects AI revenue to show strong growth next year. Despite the slightly weaker revenue outlook, fourth-quarter profitability looks very strong. Management guided for adjusted EBITDA to come in at roughly 64% of expected revenue, or $8.96 billion. That’s better than the Street’s estimate of $8.84 billion. Based on Q3 results and Q4 guidance, full-year revenue is expected to be approximately $51.5 billion, in line with consensus estimates and slightly higher than Broadcom’s previous full-year forecast of $51 billion. (Jim Cramer’s Charitable Trust is long-term in AVGO. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after sending a trade alert before executing the trade. The above INVESTING CLUB information is subject to our Terms and Conditions and Privacy Policy, along with our Disclaimer. No fiduciary obligation or duty is, and is not, created by your receipt of any information provided in connection with the Investment Club. 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A sign is placed in front of the Broadcom corporate office in San Jose, California.
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Broadcom reported better-than-expected earnings on Thursday, helped by strong sales of its artificial intelligence products and VMware software. But management’s guidance for the current quarter disappointed investors, sending the chipmaker’s shares down about 7% in the aftermarket. That’s a particularly harsh reaction to otherwise strong results.
