Broadcom's Q3 Earnings: AI Momentum and Market Expectations

Broadcom Q3 Earnings Preview: Can 'Sustained AI Order Momentum' Help Company With History Of Beating Estimates? - Broadcom (NASDAQ:AVGO)

Attention is on the company's AI business segments and growth opportunities. Analysts and investors will likely be looking for commentary on artificial intelligence revenue when semiconductor company Broadcom Inc AVGO reports third-quarter financial results Thursday after market close. Earnings Estimates: Analysts expect Broadcom to report third-quarter revenue of $12.96 billion, according to data from Benzinga Pro. The company reported revenue of $8.88 billion in last year's third quarter. Broadcom has beaten analyst estimates for revenue in two straight quarters and 16 of the past 17 quarters. Analysts expect the company to report third-quarter earnings per share of $1.20, compared to $1.05 in last year's third quarter. The company has beaten analyst estimates for earnings in 13 straight quarters. Thursday's earnings report comes as Broadcom stock is up 42% year-to-date in 2024 as seen on the Benzinga Pro chart below. Did You Know? Nancy Pelosi Owns Broadcom Shares. Get Tips On What They Bought And Sold Ahead Of The 2024 Election With Our Easy-to-Use Tool What Analysts Are Saying: Broadcom is one of several companies that could benefit from a $150 billion artificial intelligence silicon market opportunity, JPMorgan analyst Harlan Sur said in July. The analyst said the AI sector sets Broadcom up for growth ahead both in the near term and long term. "The strong y/y booking trends that the team saw in Apr-Qtr for their non-AI semi business continues to persist into the Jul-Qtr on top of sustained AI order momentum," Sur said. Sur said the $150 billion AI silicon revenue opportunity could come from four or five customers over the next five years. "Incumbency is a big competitive advantage for Broadcom in its AI ASIC business and its strong technology capabilities/expertise/IP should drive increasing customer stickiness on higher chip complexities." The analyst said Broadcom's expertise in Ethernet networking could help the company's leadership in the sector, with the company powering seven of the eight largest AI clusters around the world. Broadcom was one of several semiconductor winners named in a recent report from Cantor Fitzgerald analyst C.J. Muse. "Stick with AI first and foremost," Muse said of the semiconductor space. Muse said when it comes to semiconductor companies and AI, "you either have it or you don't." "2Q continued to show a divergence between the haves and have-nots, with anything AI-related thriving, while other areas remain in the cyclical doldrums." Key Items to Watch: The company's AI segment and commentary will be closely monitored by investors and analysts. "Broadcom's second quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds," Broadcom CEO Hock Tan said previously. Broadcom's non-AI business segments could also be an area to watch and one of the underrated areas for investors to focus on. The company recently announced the launch of enterprise agility platform Rally Anywhere. The company also launched VMware Cloud Foundation 9 and several other platforms in recent months. Investors and analysts could get updates on the reception for the new products and updates and their revenue potential going forward. Broadcom's earnings report comes around a week after semiconductor giant Nvidia reported quarterly results. Nvidia beat estimates for both revenue and earnings per share and issued strong guidance. Nvidia shares have fallen since earnings with investors dissecting the smaller growth and beat than in past quarters and concerns for high-growth expectations ahead. Guidance from Broadcom could prove to be the most important part of the third-quarter results. The company raised its full-year revenue guidance to $51 billion, up from a prior guide of $50 billion, when second-quarter results were reported. Analysts and investors could be banking on another guidance raise after the third quarter. AVGO Price Action: Broadcom shares trade up 41.39% at $153.46 on Wednesday versus a 52-week trading range of $79.54 to $185.16. Read Next: Broadcom Secures Major Wins With OpenAI, Google, Meta As It Targets $150B AI Market Photo: Shutterstock Market News and Data brought to you by Benzinga APIs

Broadcom Ahead of Q3 Earnings: To Buy or Not to Buy the AVGO Stock - Broadcom (NASDAQ:AVGO)

Broadcom AVGO is set to report its third-quarter fiscal 2024 results on Sep. 5. The Zacks Consensus Estimate for revenues is pegged at $12.9 billion, suggesting growth of 45.36% from the year-ago quarter's reported figure. The consensus mark for earnings has been steady at $1.20 per share over the past 30 days, indicating 14.29% growth from the figure reported in the year-ago quarter. Broadcom's earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average earnings surprise being 2.74%. AVGO's fiscal third-quarter results will provide investors an opportunity to analyze the prospects of AI and Generative AI (GenAI). While continued momentum will boost investor confidence, any weakness that reflects the cooling of an AI-fueled rally can negatively impact Broadcom's share price movement. Broadcom Inc. Price and EPS Surprise Broadcom Inc. price-eps-surprise | Broadcom Inc. Quote Let's see how things have shaped up for AVGO shares prior to this announcement: Factors to Note Prior to AVGO's Q3 Earnings Broadcom's fiscal third-quarter results are expected to have benefited from its expanding AI and Gen AI offerings. In the second quarter of fiscal 2024, AI revenues surged an astounding 280% year over year and are now expected to be more than $11 billion for fiscal 2024. The Zacks Consensus Estimate for fiscal third-quarter Semiconductor Solutions revenues are pegged at $7.38 billion, indicating 6.3% year-over-year growth. Broadcom's expanding clientele, which includes the likes of Alphabet and Meta Platforms, is noteworthy. Alphabet is one of the large customers of Broadcom's application-specific integrated chips (ASICs). These chips are designed to support AI and machine learning and make these tasks more efficient. Meta Platforms has also become an important customer as it is using AVGO's ASICs to develop Metaverse hardware. Strong results at VMware are expected to have driven top-line growth. Broadcom expanded its hybrid cloud portfolio with the acquisition of VMware in 2023. This has accelerated app delivery, enabled zero-trust security and delivered software-defined services to its customers. Broadcom's focus is on shifting VMware products to a subscription-based model. AVGO has signed up approximately 3,000 customers to develop its own virtual private cloud on-premise infrastructure, which boosted Broadcom-owned VMware's Annualized Booking Value. This step increased VMware's annualized booking revenues by 41.7% sequentially to $1.9 billion in the fiscal second quarter. Although rapid GenAI adoption bodes well for Broadcom's prospects, we expect sluggishness in the enterprise and telecommunication end markets to have hurt broadband growth. Weak demand for server storage connectivity solutions has been a concern. AVGO Shares Outperform Sector YTD Year to date (YTD), AVGO shares have returned 47%, outperforming the broader Zacks Computer & Technology sector's return of 19.6% and the Zacks Electronics - Semiconductors industry's gain of 24.2%. Year-to-Date Performance Image Source: Zacks Investment Research The AVGO stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment. In terms of the forward 12-month Price/Sales ratio, Broadcom's shares are trading at 12.84X, higher than its median of 11.41X and the Zacks Electronics - Semiconductors industry's 6.37X. P/S Ratio (F12M) Image Source: Zacks Investment Research Strong AI Portfolio Aids AVGO's Long-Term Prospects AVGO's long-term prospects are expected to benefit from the growing demand for AI infrastructure and the robust deployment of the GenAI portfolio. Broadcom's solutions are suitable for addressing the needs of an increasing AI workload and the growing need for fast networking in data centers. A solid portfolio is helping in expanding clientele that includes the likes of Alphabet and Meta Platforms. Its strong partner base, including Microsoft, Arista Networks, Dell Technologies, Juniper and Supermicro, has been a key catalyst. Broadcom now expects fiscal 2024 AI revenues of more than $11 billion (higher than the previous guidance of $10 billion). Server storage revenues for fiscal 2024 are expected to decline roughly 20% on a year-over-year basis. Broadband revenues are expected to be down high 30s year over year for fiscal 2024. The strong portfolio has prompted Broadcom to raise guidance. For fiscal 2024, AVGO expects revenues of $51 billion (up from the previous guidance of $50 million) and adjusted EBITDA margin of 61% (up from 60%). The rise reflects the growing dominance of AVGO in the AI infrastructure market. The Zacks Consensus Estimate for revenues for fiscal 2024 of $51.37 billion suggests 43.43% growth over fiscal 2023. The consensus estimate for earnings is pegged at $4.72 per share, unchanged over the past 30 days. Conclusion Broadcom's strong portfolio, along with an expanding partner base, surely reflects solid top-line growth potential over the long run. However, sluggish broadband and server storage end-markets are expected to hurt prospects in the near term. Broadcom currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock. To read this article on Zacks.com click here. Market News and Data brought to you by Benzinga APIs

Broadcom Stock May Drop Sharply Following Results (NASDAQ:AVGO)

Looking for more investing ideas like this one? Get them exclusively at Reading The Markets. Learn More " Broadcom (NASDAQ:AVGO) will report its fiscal third quarter earnings after the market closes on Sept. 5. Analysts are forecasting a 15% y/y increase in earnings per share to $1.22, alongside a significant 46% y/y growth in revenue, bringing the total to approximately $13 billion. However, it's important to note that the growth in Broadcom's Semiconductor Solutions segment is expected to be relatively modest, with an anticipated increase of just 7% y/y, reaching $7.4 billion. The company's AI segment is projected to see only a slight uptick, growing by 5% q/q to $3.3 billion. In contrast, Broadcom's infrastructure software segment drives much of the company's overall growth. This unit is expected to see its sales more than double, reaching $5.5 billion, with VMware contributing $3.3 billion. This shift highlights Broadcom's growth, which is increasingly coming from its software side, mainly through acquiring VMware, rather than from its traditional semiconductor business. This dynamic may surprise those who view Broadcom primarily as an AI-driven company, which makes up a relatively small amount of total revenue. Despite the company's impressive growth figures, Broadcom no longer provides quarterly guidance, having shifted to offering only annual forecasts. For the current year, the company is targeting $51 billion in revenue, a figure that was reiterated last quarter. Analysts expect it to slightly exceed that at $51.7 billion. Broadcom has a history of reporting in line with revenue estimates, with last quarter marking its most significant beat in recent times at 3.5%. Regarding adjusted earnings, the company also tends to beat expectations by a small margin, typically around 1%. Market expectations for Broadcom's stock movement post earnings are modest, with a projected move of around 6.7%. Looking at options positioning for the week of Sept. 6, implied volatility [IV] is relatively modest at 77%, though it should continue to rise heading into the earnings release as event risk builds. The options market is very bullish on Broadcom, as noted by the solid positive call gamma and delta values, particularly around the $160 strike price, with resistance at $170 and support near $150. It's important to note that once the event risk passes, the implied volatility will drop, and both the calls and the puts will see their premiums fall dramatically. As of Sept. 3, a buyer of the $160 calls needs the stock to rise above $166 following the results, or the options will lose value by 6.5%. This is similar to what happened with Nvidia, and if the stock cannot clear $160, option holders could sell their positions. That may be hard to do, considering the implied move being priced in by the market is just 6.75%, as already noted. From a technical perspective, Broadcom's stock is currently trading around $155, a level that had previously served as support. The $170 area appears to be a key resistance point, while the $136 region has recently been a support zone. Valuation wise, Broadcom is trading at 26 times earnings, significantly higher than its historical average of around 13 to 14 times. On a price-to-sales basis, the stock is currently valued at 12 to 13 times sales, well above historical norms. This elevated valuation suggests that much of the optimism around Broadcom is tied to its AI prospects, despite the bulk of its growth coming from the VMware acquisition. While Broadcom's AI business is expected to contribute significantly to its revenue in the coming years, its current valuation appears stretched, particularly when compared to its historical trends. Investors seem to be betting on further upside, but the steep valuation raises questions about whether Broadcom can continue to justify its premium valuation. Additionally, the big risk here is that Broadcom does what it normally does when it reports results, delivering as expected. If that should happen, the overly bullish options market is likely to bring a lot of stock for sale, pushing shares lower, and making the call options a losing bet.

Why Broadcom Should Beat Earnings Again (NASDAQ:AVGO)

I initiated coverage of Broadcom Inc. (NASDAQ:AVGO) stock on July 20, 2023, with a "Hold" rating, which I upgraded to "Buy" in April 2024, admitting my mistake and assuming that the risks I was afraid of initially might not exist. Since my upgrade, the stock has continued to rise, gaining nearly 13% to date so far and outperforming the S&P 500 Index (SP500) (SPY) by a factor of 2. However, since my last update, the stock has entered its volatile phase, becoming an underperformer. As AVGO is scheduled to release its Q3 FY2024 results on September 5 (after market close), I would like to update my coverage in advance and check how high the company's chances are of beating the current consensus again this time. In this part, let's just briefly mention the most crucial parts from the Q2 report - for a more detailed analysis, please take a look at my previous article, as the data analyzed here and there doesn't differ. AVGO's sales of $12.49 billion in Q2 showed a whopping 43% increase on the same period last year, beating Wall Street estimates by nearly $500 million, which was a lot. Also, the company's actual earnings per share for the quarter climbed 6% YoY to $10.96 (or $1.1 after adjusting for the stock split), also exceeding consensus expectations. All that led to Q3 estimates revisions to the upside - 19 out of 27 analysts increased their projections for the next quarter: Broadcom's AI-related revenue skyrocketed by 280% YoY to ~$3.1 billion, so it looks like the acquisition of VMware was well-timed, and it is already proving its worth; VMware contributing ~$2.7 billion to infrastructure software sales, which now account for about 42% of total sales, potentially leading to higher margins for the business overall. In the Semiconductor Solutions segment, Broadcom achieved a 6% YoY revenue increase, reaching ~$7.20 billion. As I can see, the networking business within this segment showed particularly strong growth, with revenue rising 44% annually to ~$3.8 billion. Broadcom's focus on Ethernet solutions for AI clusters appears to be yielding positive results, as evidenced by the doubling of switch and router sales year-over-year. With adjusted EBITDA reaching nearly $7.5 billion and representing a robust 59% margin relative to sales, Broadcom demonstrated strong profitability in Q2. Also, important to note here is that approximately 72% of that EBITDA figure translated into net income, so it's not just an "inflated non-GAAP metric." Despite a significant increase in the number of outstanding shares, which grew by over 12% compared to the same quarter last year, Broadcom still managed to deliver non-GAAP EPS growth of ~6% YoY. Although it was slightly lower than the previous quarter, I believe this performance was more than sufficient to please investors, taking into account the acquisition integration efforts it possibly took for AVGO to come where it is today. I also think Broadcom has demonstrated a disciplined approach to debt management. Despite taking on substantial debt for acquisitions, including $28 billion for the VMware deal, the company has maintained a debt-to-EBITDA ratio of 2.1x, which is comfortably below its target of 2.5x. From Q2 results, I think we could expect Broadcom to maintain strong profitability in the foreseeable future even as it expands its operations. Following the great performance in Q2, AVGO's management has revised its outlook for FY2024 upward, projecting annual revenue to exceed $51 billion, an increase from the previous guidance of $50 billion. So this new forecast represents over 40% top-line growth, which is quite impressive. The company also anticipates that at least 37% of its semiconductor revenue will be derived from generative AI applications, an increase from earlier projections. With software expected to contribute up to 40% of total revenue, I believe Broadcom should be positioned for continued margin expansion - the management's statements that "VMware margins should improve towards the "classic Broadcom" software margin by FY2025" supports this assumption of mine. The Q2 results revealed that certain segments of the company were still experiencing a cyclical decline. However, during the last earnings call, management suggested that Q2 might represent the bottom of this cycle's downturn. As Michael del Monte, another SA analyst, recently noted in his brilliant article, server storage connectivity could be poised for a rebound in the second half of FY2024, driven by the increasing demand for data storage in AI/ML applications. So, perhaps we can expect some positive surprises on this front, who knows? Now let's examine how market expectations have evolved regarding the company's anticipated Q3 results, due to be released tomorrow. Looking at the projections for the next few years, an interesting picture emerges. Following management's comments from Q2, the market only slightly adjusted its estimates for AVGO's full-year revenue (their modest increase aligns with management's own upward revision). For the full year 2024, Wall Street now expects the company to exceed the forecast by half a billion dollars. On the other hand, regarding earnings per share, it appears to me the market is less optimistic. Analysts seem to have been concerned about the marginality trends observed earlier in the year; consequently, they've slightly lowered their EPS forecasts through Q2 2025: Overall, I see no compelling reason to share the slight pessimism that we may witness based on the analysts' forecast adjustments for the earnings over the past three months. The management's decision to raise the sales forecast, combined with the initiatives to reduce debt and maintain profit margins, suggests a positive outlook for Q3. Given the market's current reduced forecasts for Q3 and Q4, all the factors I mentioned above suggest that the company is well-positioned to exceed consensus expectations. In fact, my base case assumption is that Broadcom is likely to outperform current conservative market projections. In late August 2024, Broadcom unveiled 3 new tools related to its recent VMware acquisition: "enhanced network appliances combining fixed Wireless Access and satellite connections, a new cybersecurity solution, and improvements to their edge computing stack". It's all part of Broadcom's grand plan to grab a bigger slice of the edge computing pie, which is expected to be worth a whopping $232 billion this year, according to Seeking Alpha News. I believe that providing a more detailed description of the prospects offered by these new tools, along with a more comprehensive commentary on the recovery of segments currently experiencing a cyclical decline, should serve as an essential bullish catalyst for Broadcom's stock following the Q3 results. Consequently, in light of likely positive comments from management and the potential for exceeding consensus forecasts, the company's stock should in theory continue its upward trajectory in the medium term. According to Seeking Alpha's Quant system, Broadcom's stock is currently rated as 'D-' for Valuation, which suggests a potential overvaluation compared to the sector's norms. However, we must understand that the expansion of multiples we have seen in recent years is mainly justified by Broadcom's relatively wide moat, so the premium the stock holds today is primarily explained by the size factor. Moreover, as the annual EPS consensus estimates show, the general trend is upward: As the company acquires new assets year after year, expands its product line, and maintains its position as a major chip supplier in its niche markets, its earnings continue to grow at a rapid pace. While the market may appear pessimistic in the short term (in my view), the long-term outlook remains robust as Wall Street analysts expect the EPS CAGR for the next 5 years to exceed 20%. In my opinion, this projected growth more than justifies the current high multiples. Since the publication of my last article, the financials have remained unchanged, so my DCF model's output should stay the same. So again, even when considering the significantly pessimistic input data I used previously, such as a conservative EV/FCF exit multiple relative to where it stands today, the fundamental undervaluation of the company still exceeds 35%. Moreover, taking into account the recent decline in the stock price, the upside potential may now surpass 40%. So I have no choice but to reiterate my "Buy" rating on AVGO right before its Q3 report release. As I noted in my previous article, all prospective buyers of AVGO stock should keep in mind that investing in Broadcom, like anything else on the stock market, comes with risks. So again, it's essential for investors to consider the company's recent acquisition spree, which has significantly increased the company's debt load. However, I'd like to immediately note here that thanks to the strong FCF that the company generates, its debt-to-equity is still well below 1, and it keeps falling lower. Anyway, although AVGO's debt seems to be manageable, if the company fails to sustain its growth momentum over an extended period, the burden of debt could negatively impact its financial performance and, subsequently, its stock price. Another significant risk to my bullish outlook is the potential overvaluation of the company. Despite my attempts to justify the premium on current multiples, they remain notably high, even by historical standards. Trading at a forward non-GAAP P/E ratio of ~34x, Broadcom's stock may indeed be overvalued. This assessment is corroborated by some external sources. For instance, Morningstar's valuation model [proprietary source] suggests a fair value of $155 per share, which isn't far from current prices - this proximity to the estimated fair value indicates potentially limited growth in the foreseeable future. Despite the risks mentioned above and the recent volatility in the semiconductor industry as a whole, I maintain a positive outlook for Broadcom. I believe it's very likely that the company will exceed the current Q3 2024 consensus. Furthermore, in my base case scenario, I expect management to make optimistic comments that could usher in a new round of growth for the stock in the medium term. The current Wall Street forecasts and recent news seem to provide a favorable environment for these expectations. Given these factors, I reiterate my "Buy" rating on Broadcom. I eagerly await the release of the report on September 5 after the market closes, which should provide further clarity.