AI chipmaker Broadcom shares soar 17% despite mixed quarterly results — here’s why

Broadcom shares soared Thursday after the chipmaker demonstrated strong profitability in its fourth quarter and provided a slew of upbeat updates on its artificial intelligence business — a mix so good that investors looked past a minor sales miss. Revenue in the fiscal 2024 fourth quarter increased 51% year over year to $14.05 billion, missing analysts’ forecasts of $14.09 billion, according to estimates compiled by LSEG. Excluding the contribution from VMWare, Broadcom’s organic sales grew 11% year over year. Adjusted earnings per share (EPS) increased 28% from the year-ago period to $1.42, which exceeded expectations of $1.38, LSEG data showed. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $9.09 billion in the quarter, outpacing the $8.97 billion consensus estimate on Wall Street, according to FactSet. With shares up roughly 17% in premarket trading Friday, Broadcom is on track to open the regular session at a fresh all-time high above $200 apiece. The stock’s current record close of $185.95 was set on Oct. 9. AVGO YTD mountain Broadcom’s year-to-date stock move. Bottom line The headline numbers for the August-to-October quarter may have been mixed, but make no mistake, this was a very strong report. You wouldn’t understand just how strong, though, unless you listened to the earnings call. It is the latest example to support Jim Cramer’s long-held investing principle that investors need to wait for the call before making a post-earnings trade. Sure, Broadcom shares initially traded up on the release thanks to the earnings beat 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 unnamed “hyperscale” customers and is key to our investment thesis. Those clients are widely believed to be Club names Alphabet and Meta Platforms — and more recently, TikTok parent ByteDance. In addition to strong demand from those three customers, Tan said Broadcom is now in advanced AI chip development with “two additional hyperscalers,” with hopes to turn them into revenue-generating customers before 2027. Tan’s disclosure came just one day after The Information reported that Club holding Apple was working with Broadcom on a custom chip for data centers. Considering that report, it stands to reason that Apple is one of those new customers. While Broadcom is abiding by the No. 1 rule of working with Apple — don’t ever mention Apple — the two California-based companies already work together on chips for the iPhone (more on that later). Broadcom (AVGO) Why we own it : Broadcom is a high-quality semiconductor and software company run by an incredible CEO in Hock Tan, who is best known for his value-creating M & A strategy. We view Broadcom as one of the biggest AI beneficiaries through its networking and custom chip businesses. The stock trades at a much more reasonable price-to-earnings ratio relative 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 buy : Oct. 3, 2023 Initiation date : Aug. 24, 2023 Tan also provided a rosy forecast on where Broadcom’s entire AI business can go from here, even before counting the new custom-chip clients. The other bucket of Broadcom’s AI business is tied to sales of networking chips, which are effectively part of the “plumbing” of a data center and help various parts communicate as a larger computing factory. Tan estimated Broadcom’s serviceable addressable market, or SAM, for AI to be about $60 billion to $90 billion by fiscal 2027. At the same time, Tan indicated this could prove conservative as these additional customers will likely increase the AI SAM “significantly,” should these projects develop as expected. Roughly a year after closing, Broadcom’s VMware acquisition is progressing well, with the software provider’s business showing improved bookings and reduced operating costs. On the call, Tan said since the deal was finalized, Broadcom has managed to sign up over 4,500 of its 10,000 largest customers for VMware Cloud Foundation, which the CEO described as “the full software stack virtualizing the entire data center.” Elsewhere, Broadcom did not deliver the buyback announcement we hoped for, but management assured investors that the company is instead using its cash flow to diligently reduce its debt load. That’s an acceptable trade-off, as far as we are concerned, because the VMWare acquisition required Broadcom to use financing. Put it all together — robust results, a positive outlook for the current quarter and, especially, the two new customers for its custom AI chip business — and we are increasing our price target on the stock to $230 a share from $190. We also are reiterating our buy-equivalent 1 rating, but it’s important to note our style is generally not to chase huge stock moves like we’re seeing in after-hours trading Thursday. Quarterly commentary Semiconductor solutions revenue increased more than 12% year over year to $8.23 billion, exceeding expectations, according to FactSet. Networking: Total revenue increased 45% year over year to $4.5 billion, ahead of the $4.3 billion expected. Tan said 76% of sales came from AI networking solutions, which were up about 158% year over year. “This was driven by a doubling of our AI export shipments to our three hyperscale customers, and four times growth in AI connectivity revenue, driven by our 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 businesses: Wireless : Revenue increased 7% year over year to $2.2 billion, ahead of the $1.96 billion consensus estimate, driven by higher content in customer devices. The result also represents a 30% sequential increase — not a total surprise, given this 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 he’s aware of growing investor concern about Apple potentially moving some connectivity chip production in-house . “We continue to be very engaged with this customer in multi-year roadmaps across various technologies,” Tan said, which hopefully will soothe some of those worries, at least in the short term. Predicting Apple’s moves over the long term is difficult, but the prospect of Apple reportedly utilizing Broadcom’s custom-chip solutions is important context going forward. Where revenue is recognized may move around a bit over time, but it doesn’t appear to be the end of this relationship by any means and selling Broadcom stock on these concerns is likely to prove shortsighted. Server and storage connectivity : Sales came in at $992 million, which Tan noted indicated a roughly 20% rebound from the bottom put in six months ago. That’s better than the $915 million expected. Broadband : Sales fell 51% year over year to $465 million, well below the $550 million expected. To be sure, Tan said he believes this sub-segment has “reached bottom,” adding: “We have seen significant orders across multiple service providers during this quarter and reflecting this trend, we now expect broadband to show recovery beginning in Q1.” Industrial : Sales fell 27% year over year to $173 million, below the $187 million expected. This sub-segment represents only about 1% of total company revenue, so its results don’t matter much at all for the overall investment story. Over at infrastructure software , Broadcom posted weaker-than-expected revenues of $5.82 billion, but the blockbuster acquisition of VMWare, which closed just over a year ago, led to a nearly 200% year-over-year increase. VMware continues to show solid momentum, with Tan noting that the annualized booking value increased to $2.7 billion in the fourth quarter, up from $2.5 billion in the prior quarter. “The integration of VMware is largely complete,” he said on the call. “Revenue is on a growth trajectory, and operating margin reached 70% exiting 2024. We are well on the path to delivering incremental adjusted EBITDA at a level that significantly exceeds the $8.5 billion we communicated when we announced the deal,” he continued. “We’re planning to achieve this much earlier than our initial target of three years.” Tan said VMware’s associated costs in the quarter came in at $1.2 billion, down from $1.3 billion in the third quarter and $1.6 billion in the second quarter. For comparison, at the time of Broadcom’s acquisition, Tan said VMware averaged around $2.4 billion. That steep decline is a refection of Broadcom’s acquisition playbook — at the highest level, it is buy quality companies and materially improve their profitability. Outlook For the first quarter of fiscal 2025, Broadcom expects revenue to be approximately $14.6 billion, which is basically on par with the Street’s consensus estimate of $14.57 billion, according to LSEG. By segment, semiconductor revenue is expected to be $8.1 billion, a slight miss versus expectations of $8.27 billion. Meanwhile, infrastructure software sales are expected to be about $6.5 billion, ahead of the $6.28 billion the Street was looking for. On the semiconductor guide, management noted that AI revenue is expected to to grow 65% year over year to roughly $3.8 billion. While the sales outlook was in line, first-quarter profitability looks very strong. Management guided adjusted EBITDA to approximately 66% of projected revenue, or $9.636 billion, well ahead Street estimates of $9.234 billion, according to FactSet. (Jim Cramer’s Charitable Trust is long AVGO, GOOGL, AAPL and META. See here for a full list of the stocks.) As a subscriber to the 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’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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