Shares of Broadcom jumped more than 14% in extended trading Wednesday after the chip and software maker reported better-than-expected quarterly results, thanks to strong demand for artificial intelligence and VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split. Club Name’s second-quarter fiscal 2024 revenue ended May 5 rose 43% from year over year to reach $12.5 billion, beating analysts’ forecasts of $12.06 billion, according to estimates compiled by LSEG, formerly Refinitiv. Excluding VMWare’s contribution, Broadcom’s sales increased by 12% year-on-year. Adjusted earnings per share (EPS) rose 6% from a year ago to $10.96, beating expectations of $10.85. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $7.43 billion for the quarter, beating Wall Street’s forecast of $7.05 billion. Broadcom Why We Own It: Broadcom is a high-quality semiconductor and software company led by an incredible CEO in Hock Tan, best 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 trades at a much more reasonable price-to-earnings ratio compared to other chip stocks. The company also has a shareholder-friendly capital allocation strategy with its dividends and buybacks. Competitors: Marvell Technology, Advanced Micro Devices, and Nvidia Last Purchase: October 3, 2023 Launch Date: August 24, 2023 Conclusion This was a strong quarter for Broadcom that solidified our thesis in the company. Broadcom’s AI business saw continued sales growth, with management increasing its full-year outlook to $11 billion, confirming our view that it is one of the best AI chip titles on the market. As the rest of its traditional semiconductor business continues to struggle, there are encouraging signs of a bottom in the coming quarters, setting the stage for a recovery next year. We also continue to see gains at VMware. Broadcom’s progress this early in the integration is very encouraging, but we have never had any doubts based on management’s experiences with mergers. CEO Hock Tan and his team do an exceptional job finding strong businesses to acquire that can generate both revenue and cost synergies (by reducing costs), thereby generating more free cash flow which they use to increase dividends, buy back shares and find more companies to buy into. To top it all off, Broadcom announced a 10-for-1 forward stock split that will take effect after the close on July 12. As we’ve said before, in theory, stock splits shouldn’t matter. But if you look at the reception that Lam Research, Chipotle, Walmart, and, most recently, Club chipmaker Nvidia, have received with their splits, they’re clearly not doing any harm. And it’s a good thing that Broadcom wants to make its shares more accessible to investors and employees. As a result of the beat, raise and stock split (which you can’t deny had a positive impact on the stock), we are raising our price target for Broadcom to $1,900 per share, compared to $1,550. The stock’s price-to-earnings ratio is no longer as cheap as it once was, but we can justify its growing premium to the market with its strong AI-driven revenue outlook, strong margin performance and commitment to return liquidity to shareholders. AVGO YTD mountain Broadcom YTD stock closed Wednesday at a record high of just under $1,500 per share and has gained about 34% year to date. Based on its current after-market price, the stock could open Wednesday near $1,700. Quarterly Commentary Semiconductor solutions revenue increased 6% year over year to $7.2 billion, beating expectations, as continued strength in AI-related sales more than offset weakness persistent cyclical revenues of businesses and telecommunications companies. Networks: Revenue increased 44% year over year to $3.8 billion and accounted for 53% of semiconductor sales in the quarter. AI spending is the dominant theme here, with revenue from custom networks and accelerators up 280% year over year to $3.1% billion. CEO Hock Tan highlighted on the post-results conference call that as AI data center clusters continue to deploy, the company sees its revenue mix shift towards an increasing proportion of networks. Broadcom operates an Ethernet network, different from Nvidia’s InfiniBand solutions. On the custom chip side, Broadcom said its hyperscale customers are accelerating investments to improve the performance of its data center clusters. Although the company doesn’t call them by name, it’s widely believed that club names Alphabet and Meta Platforms — and more recently, TikTok’s parent company ByteDance — are the primary customers of these custom AI accelerators. Traditional semiconductor businesses were weak, as expected. Wireless: Revenue increased 2% year over year to $1.6 billion and accounted for 22% of semiconductor revenue. The company hasn’t changed its previous forecast for flat year-over-year revenue, but we can’t help but think that a new upgrade cycle at Apple, its wireless client , could help increase sales in the future. Server and Storage Connectivity: Sales fell 27% year over year to $824 million, or 11% of semiconductor revenue. This activity was brutal for a while, but Tan called this quarter a trough and reiterated his expectation of a recovery in the second half. Tan now sees storage revenue down about 20% this year, perhaps a little better than the decline predicted in the mid-20s. Broadband: Sales fell 39% year over year to $730 million and represented 10% of the segment’s revenue. Demand has improved here and activity is not expected to bottom out until the second half of this year. This pessimistic outlook led management to revise its sales forecast for the full year, down 30% year-on-year, compared to a decline of just over 30%. Industrial: Sales fell 10% year-over-year for this small part of the business and management lowered its forecast to a double-digit decline for the year, from previous guidance, to a single-digit decline. Broadcom’s other segment, infrastructure software, also beat expectations, growing 175% year-over-year to $5.3 billion. VMware was a bright spot, with revenue of $2.7 billion, up from $2.1 billion in the previous quarter. It’s still early days for benefits from the VMware deal, as Broadcom expects its revenue to accelerate to a rate of $4 billion per quarter in the future. Tan said the integration of VMware, which it acquired late last year, is going well with its transition to a subscription licensing model. And the results confirm it. Not only did the annualized value of bookings increase, but redundant costs were also eliminated, resulting in a nice increase in revenue and expenses. Broadcom said the spending rate at VMware was $1.6 billion in the quarter, down from $2.3 billion per quarter before the acquisition. Tan sees that figure falling to $1.3 billion at the end of the fourth quarter, ahead of his previous plan of $1.4 billion. He then thinks it will stabilize at $1.2 billion after integration. Capital Allocation Overall, Broadcom generated about $4.5 billion in free cash flow during its second quarter of fiscal 2024, but that number climbs to $5.3 billion, up 18% year-over-year, excluding restructuring and integration during the quarter. This strong cash generation allowed Broadcom to spend $1.55 billion on stock repurchase withholding taxes on vesting of stock awards to eliminate 1.2 million shares, paying $2.4 billion in dividends and paying down $2.4 billion in debt. There have been no formal repurchases of common stock as part of its repurchase program, but the company just completed its first fiscal quarter in which it repurchased $7.1 billion worth of stock. Outlook After a strong first half of its 2024 fiscal year, Broadcom raised both its revenue and adjusted EBITDA outlook. The company now expects revenue of $51 billion, up from $50 billion, with adjusted EBITDA of approximately 61% of projected revenue, up from 60%. This equates to approximately $31.11 billion. The positively revised update beat FactSet’s estimates of $50.58 billion in revenue and $30 billion in adjusted EBITDA. One reason for the increase: Broadcom has an improved outlook for AI revenue, which is now expected to total more than $11 billion this year, up from its previous target of around $10 billion. dollars. This still seems conservative to us. (Jim Cramer’s Charitable Trust is long AVGO, NVDA. GOOGL, META. 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 performs a transaction. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. 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Hock Tan, CEO of Broadcom
Lucas Jackson | Reuters
Broadcom Shares jumped more than 14% in extended trading Wednesday after the chip and software maker reported better-than-expected quarterly results, thanks to strong demand for artificial intelligence and VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split.