Broadcom’s Q3 Earnings: AI Fuels Growth, But Headwinds Remain
Broadcom Inc. (AVGO) is set to report its third-quarter fiscal 2024 results on Sep. 5, providing investors with crucial insights into the company’s performance in the rapidly evolving Artificial Intelligence (AI) and Generative AI (GenAI) landscape. The company’s recent expansion into these areas has driven significant revenue growth, but certain headwinds in other segments could temper overall optimism.
Key Takeaways:
- Strong AI Performance: Broadcom’s AI revenues surged an astounding 280% year over year in the second quarter of fiscal 2024 and are expected to exceed $11 billion for the entire year.
- Expanding Clientele: Broadcom has secured key customers like Alphabet and Meta Platforms, who rely on the company’s application-specific integrated chips (ASICs) to power their AI and machine learning operations.
- VMware Integration: Broadcom’s acquisition of VMware in 2023 has boosted its hybrid cloud portfolio and accelerated app delivery, driving significant growth in its software-defined services.
- Sluggishness in Other Markets: While AI is a bright spot, Broadcom’s broadband and server storage segments are facing headwinds due to weak demand.
- Valuation Concerns: Although AVGO shares have outperformed the broader market year-to-date, the stock’s high valuation raises some concerns.
Factors to Note Prior to AVGO’s Q3 Earnings
Broadcom’s strong AI performance throughout the fiscal year is expected to be a key driver of its Q3 earnings. The company’s AI-focused ASICs are increasingly in demand as businesses worldwide look to leverage the power of AI to enhance their operations. The acquisition of VMware has also provided a significant boost, as Broadcom moves to integrate its software-defined services into a subscription-based model.
However, certain headwinds in other market segments could affect overall performance. Slowing demand in the enterprise and telecommunications sectors is expected to impact broadband growth, while server storage connectivity solutions are facing challenges.
AVGO Shares Outperform Sector YTD, but Valuation Concerns Remain
Year-to-date, AVGO shares have returned a strong 47%, outperforming both the broader Zacks Computer & Technology sector (19.6%) and the Zacks Electronics – Semiconductors industry (24.2%). However, the stock’s valuation is currently stretched, as indicated by its Value Score of F. This suggests that investors might be paying a premium for AVGO’s growth prospects.
The forward 12-month Price/Sales ratio for Broadcom’s shares (12.84X) is significantly higher than its median (11.41X) and the industry average (6.37X).
Strong AI Portfolio Aids AVGO’s Long-Term Prospects
Broadcom’s robust AI portfolio positions it for continued growth in the long term. The company’s AI solutions are meeting the needs of both enterprises and cloud providers, as demand for AI infrastructure and GenAI deployments continues to accelerate.
This strong portfolio has enabled Broadcom to raise its revenue guidance for fiscal 2024 to $51 billion, up from $50 million. The company also expects an adjusted EBITDA margin of 61%, reflecting its growing dominance in the AI infrastructure market.
However, it’s worth noting that Broadcom expects server storage revenues to decline by around 20% and broadband revenues to fall in the high 30s percentage range year-over-year in fiscal 2024.
Conclusion: Broadcom’s Q3 Earnings Offer a Mixed Bag
Broadcom’s Q3 earnings are expected to showcase the company’s impressive AI performance and continued growth in its hybrid cloud offerings. However, sluggishness in other segments could limit overall gains.
Despite its strong growth prospects, AVGO’s current valuation suggests it might be wise to wait for a more favorable entry point. Investors should closely monitor the company’s Q3 earnings report for further insights into its performance and the implications for its future.
