Broadcom shares rose more than 14% in extended trading Wednesday after the chip and software maker posted better-than-expected quarterly results, driven by strong artificial intelligence and strong demand for VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split. Revenue in the club name's fiscal 2024 second quarter, ending May 5, rose 43% year over year to $12.5 billion, beating analysts' expectations of $12.06 billion, according to For estimates compiled by LSEG, formerly Refinitiv. Excluding VMWare's contribution, Broadcom's sales rose 12% year over year. Adjusted earnings per share (EPS) rose 6% over the past year to $10.96, beating expectations of $10.85. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $7.43 billion in the quarter, topping the $7.05 billion Wall Street had expected. Broadcom 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 Bottom Line This was a strong quarter for Broadcom that reinforced our thesis on the company. Broadcom's AI business has seen sales continue to rise, with management raising its full-year forecast to $11 billion, supporting our view that this is one of the best AI chip stocks on the market. While the rest of its legacy semiconductor business continues to struggle, there are hopeful signs it will hit bottom over the next few quarters and prepare for a recovery next year. We also continue to see upside in VMware. The progress Broadcom has made so early in the integration is very encouraging, but we had absolutely no doubt based on management's experiences with mergers. CEO Hock Tan and his team do an exceptional job at finding strong companies to acquire that can generate revenue and cost synergies (by cutting costs), thus generating more free cash flow which he uses to increase dividends, buy back shares, and find more… Companies acquire. Furthermore, Broadcom announced a 10-for-1 forward stock split that will take effect after the close on July 12. As we said before, in theory, stock splits shouldn't matter. But if you look at the reception that Lam Research, Chipotle, Walmart and, more recently, chipmaker Nvidia have had at Club, with their splits, it clearly doesn't hurt. It's a good thing that Broadcom wants to make its stock more accessible to investors and employees. As a result of the rally, upside, and stock split (which you can't deny has had a positive impact on the stock), we raised our price target for Broadcom to $1,900 per share, from $1,550. The stock's price-to-earnings multiple isn't as cheap as it used to be, but we can justify its rising premium to the market through its strong AI-driven revenue outlook, solid margin performance, and commitment to returning cash to shareholders. AVGO YTD Mountain Broadcom YTD stock closed Wednesday at a record high just under $1,500 per share and has gained nearly 34% year to date. Based on its current after-market price, the stock could open Wednesday near $1,700. Quarterly Comment Semiconductor Solutions revenues grew 6% year over year to $7.2 billion, beating expectations, as continued strength in AI-related sales offset continued cyclical weakness in enterprise and telco revenues. Networking: Revenue rose 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 dedicated networking and accelerator revenues up 280% year-over-year to $3.1% billion. CEO Hock Tan noted on the post-earnings call that as AI data center clusters continue to be deployed, the company is seeing its revenue mix shift toward an increasing proportion of networking. Broadcom runs the Ethernet network, which is different from Nvidia's InfiniBand solutions. On the custom chip side, Broadcom said its hyperscale customers are accelerating investment to upgrade the performance of its data center clusters. Although the company doesn't mention them by name, the Club names of Alphabet and Meta platforms — and, more recently, TikTok's parent company, ByteDance — are widely believed to be major clients for these dedicated AI accelerators. Legacy semiconductor companies were weak, as expected. Wireless: Revenue increased 2% year over year to $1.6 billion and represented 22% of semiconductor revenue. The company made no change to its previous guidance for flat revenue year-over-year, but we can't help but think that a new upgrade cycle at Apple, its wireless client, could help boost sales going forward. Server Connectivity and Storage: Sales declined 27% year over year to $824 million, representing 11% of semiconductor revenue. It's been a brutal business for a while, but Tan called this quarter a bottom and reiterated his expectations for a recovery in the second half of the year. Tan now sees storage revenues down about 20% this year, perhaps a little better than the mid-20s previously expected. Broadband: Sales declined 39% year over year to $730 million and represented 10% of segment revenue. Demand has improved here, and business is not expected to bottom out until the second half of this year. This pessimistic outlook caused management to revise its full-year forecast for a 30% year-over-year sales decline from a decline of just over 30%. Industry: Sales were down 10% year-over-year for this small segment of the business and management lowered its forecast to a double-digit decline year-over-year compared to previous guidance to a single-digit decline. In Broadcom's other segment, infrastructure software, revenue also beat expectations, growing 175% year over year to $5.3 billion. VMware was a bright spot, with revenue of $2.7 billion, compared to $2.1 billion in the previous quarter. This is still just the beginning of the benefits of the VMware deal, as Broadcom sees revenue accelerating toward $4 billion per quarter going forward. Tan said the integration of VMware, which it acquired late last year, is going well with its move to a subscription licensing model. The results support this. Not only was there an acceleration in the annual booking value, but excess costs were also eliminated, resulting in a healthy rise in both revenues and expenses. Broadcom said VMware had spending of $1.6 billion in the quarter, down from $2.3 billion in the quarter before the acquisition. Tan sees that number falling to a run rate of $1.3 billion upon exiting the fourth quarter, ahead of his previous plan of $1.4 billion. It is then believed that it will stabilize at $1.2 billion after the merger. Capital Allocation Overall, Broadcom generated about $4.5 billion of free cash flow in the second quarter of fiscal 2024, but that number jumps to $5.3 billion, up 18% year-over-year, when excluding restructuring and integration in the quarter. This strong cash generation allowed Broadcom to spend $1.55 billion on share repurchases for tax deductions upon stock awards to cancel 1.2 million shares, pay $2.4 billion in dividends, and pay down $2.4 billion in debt. There have been no formal buybacks of common stock as part of its buyback program, but the company is coming off a fiscal first quarter in which it bought back a whopping $7.1 billion worth of stock. Outlook After a strong first half of its 2024 fiscal year, Broadcom raised its revenue and EBITDA outlook. The company now expects revenue to reach $51 billion, up from $50 billion previously, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) at about 61% of projected revenue, up from 60%. This amounts to about $31.11 billion. The revised update favorably beats FactSet estimates of $50.58 billion in revenue and $30 billion in adjusted EBITDA. One reason for the increase: Broadcom has a stronger forecast for AI revenue, which it now sees totaling more than $11 billion this year, compared to its previous forecast of about $10 billion. This still seems conservative to us. (Jim Cramer's Charitable Trust is AVGO, NVDA. GOOGL, 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. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. 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Broadcom Shares rose more than 14% in extended trading Wednesday after the chip and software maker posted better-than-expected quarterly results, driven by strong artificial intelligence and strong demand for VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split.
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