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Shares of Broadcom rose more than 14% in extended trading on Wednesday after the chip and software maker posted better-than-expected quarterly results, driven by strong demand for artificial intelligence and VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split. Revenue in the second quarter of 2024 ended May 5 rose 43% year over year to $12.5 billion, surpassing analyst expectations of $12.06 billion, according to estimates from LSEG, formerly Refinitiv. Excluding VMWare's contribution, Broadcom's revenue rose 12% year over year. Adjusted earnings per share (EPS) rose 6% year-over-year to $10.96, beating expectations of $10.85. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $7.43 billion in the quarter, better than the $7.05 billion forecast by Wall Street. Broadcom 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 its value-creating M&A strategy. We view Broadcom as one of the largest AI beneficiaries 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 employs 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 Bottom Line This was a strong quarter for Broadcom that cemented our position in the company. Broadcom's AI-related business saw continued revenue growth, with management raising its full-year guidance to $11 billion, supporting our view that this is one of the best AI chip stocks on the market. While the rest of the legacy semiconductor businesses continue to struggle, there are hopeful signs of a trough in the coming quarters, setting the stage for a recovery next year. We also continue to see positive aspects in VMware. The progress Broadcom has made so early in the integration is very encouraging, but we never had any doubts based on management's experience with mergers. CEO Hock Tan and his team do an excellent job of finding strong companies to acquire that can generate both revenue and cost synergies (by reducing costs), generating more free cash flow that the company uses to increase dividends , buy back shares and find more companies. acquire. To top it all off, Broadcom announced a 10-for-1 stock split that will take effect after the July 12 close. As we've said before, stock splits shouldn't matter in theory. But if you look at the reception that Lam Research, Chipotle, Walmart, and most recently fellow Club chipmaker Nvidia have had with their splits, they're clearly not hurting. And it's a good thing that Broadcom wants to make its stock more accessible to investors and employees. As a result of the beat, raise and stock split (which you can't deny has had a positive impact on the stock), we are raising our price target on Broadcom from $1,550 to $1,900 per share. The stock's price-to-earnings ratio isn't as cheap as it used to be, but we can justify the market's growing premium with its strong AI-driven revenue prospects, strong margin performance, and commitment to returning money to shareholders. AVGO YTD mountain Broadcom YTD The stock closed Wednesday at an all-time high of just under $1,500 per share and is up about 34% year to date. Based on the current after-market price, the stock could open around $1,700 on Wednesday. Quarterly Commentary Semiconductor solutions revenue grew 6% year-over-year to $7.2 billion, exceeding expectations, as continued strength in AI-related sales more than offset continued cyclical weakness in enterprise and telecommunications company revenue. Networks: Revenue rose 44% year over year to $3.8 billion and represented 53% of semiconductor revenue in the quarter. AI spend is the dominant theme here, with networking and custom accelerator revenues up 280% year over year to 3.1% billion. CEO Hock Tan pointed out in the post-earnings call that as AI data center clusters continue to deploy, the company will see its revenue mix shift to an increasing share of networks. Broadcom operates an Ethernet network, which is different from Nvidia's InfiniBand solutions. As for the custom chip, Broadcom said its hyperscale customers are accelerating investments to scale the performance of its data center clusters. Although the company doesn't mention them by name, club names Alphabet and Meta Platforms – and more recently TikTok parent company ByteDance – are widely believed to be the main customers for these custom AI accelerators. The traditional semiconductor business was weak, as expected. Wireless: Revenue increased 2% year over year to $1.6 billion and represented 22% of semiconductor revenue. The company hasn't changed its previous expectations for flat revenue year over year, but we can't help but think that another upgrade cycle at Apple, its wireless customer, could boost revenue in the future. Server and storage connectivity: Revenue fell 27% year over year to $824 million, accounting for 11% of semiconductor revenue. This sector has been struggling for some time, but Tan called this quarter the low point and reiterated his expectation of a recovery in the second half of the year. Tan now sees storage yields falling about 20% this year, perhaps slightly better than the mid-2020s decline than previously expected. Broadband: Revenue fell 39% year over year to $730 million and represented 10% of segment revenue. Demand has improved here and the company is not expected to bottom out until the second half of this year. This gloomy view caused management to revise its full-year forecast: sales would decline 30% year over year, from just over 30%. Industrial: Sales fell 10% year over year for this small part of the business and management lowered its outlook to a double-digit decline for the full year, from previous expectations to a single-digit decline. Broadcom's other segment, Infrastructure Software, also exceeded 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 just the start of the benefits from the VMware deal, as Broadcom sees revenue accelerating to a $4 billion per quarter run rate going forward. Tan said the integration of VMware, which was acquired late last year, is going well with the transition to a subscription licensing model. And the results support this. Not only was booking value accelerated year-over-year, but unnecessary costs were also eliminated, resulting in a significant benefit to both revenues and expenses. Broadcom said spending at VMware this quarter was $1.6 billion, compared to $2.3 billion per quarter before the acquisition. Tan sees this figure falling to a run rate of $1.3 billion at the end of the fourth quarter, ahead of the previous plan of $1.4 billion. He then thinks that after integration it will stabilize at $ 1.2 billion. Capital Allocation Overall, Broadcom generated approximately $4.5 billion in free cash flow in the second quarter of fiscal 2024, but that figure rises to $5.3 billion, an increase of 18% year over year, when excluding restructuring and integration in the quarter left. This strong cash flow generation allowed Broadcom to spend $1.55 billion on stock repurchases against tax deductions on stock award vesting to eliminate 1.2 million shares, pay out $2.4 billion in dividends and retire $2.4 billion in debt to solve. There have been no formal repurchases of common stock as part of the buyback program, but the company is coming off a fiscal first quarter repurchase of $7.1 billion in shares. Outlook After a strong first half of fiscal 2024, Broadcom increased both revenue and adjusted EBITDA guidance. The company now expects revenue to reach $51 billion, up from $50 billion previously, with adjusted EBITDA of approximately 61% of expected revenue, up from 60%. That amounts to approximately $31.11 billion. The positively revised update is above FactSet estimates of $50.58 billion in revenue and $30 billion in adjusted EBITDA. One reason for the increase: Broadcom has a brighter outlook for AI revenues, which are expected to total more than $11 billion this year, up from previous guidance of about $10 billion. This still seems conservative to us. (Jim Cramer's Charitable Trust is long AVGO, NVDA. GOOGL, 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 charity's portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. 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Hock Tan, CEO of Broadcom
Luke Jackson | Reuters
Broadcom Shares rose more than 14% in extended trading on Wednesday after the chip and software maker posted better-than-expected quarterly results, driven by strong demand for artificial intelligence and VMware. Broadcom also raised its full-year outlook and announced a 10-for-1 stock split.