Broadcom shares fell in early trading on Friday after the network chipmaker posted a mixed set of quarterly earnings and a subdued near-term revenue outlook that added to concerns that the ai investment theme may be slowing in the final months of the year.
Broadcom (AVGO) One of the best-performing companies in the market so far this year, Apple has seen a huge surge in demand for its specialized networking chips that has helped the group add more than $200 billion in value so far this year.
Chips play a key role in the development of ai systems, where big data models require a series of networks, connected by nodes, which determine the speed at which information gathered from one network is transmitted to the next.
The group also makes what are known as ASIC chips, which help hyperscalers move large amounts of data across integrated circuits and ultimately speed up the speed and reliability with which they process information.
The group's role in the ai investment theme, as well as subdued earnings and outlook released last month by market-leading chipmaker Nvidia, put its fiscal third-quarter earnings in focus as investors sought to justify the broader sector's lofty valuations.
Broadcom was able to post a modestly better-than-expected revenue figure for the three months ended July of $13.1 billion, thanks in part to a surge in demand for its ASIC and ai-focused chips, but failed to impress investors with its near-term outlook.
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ai revenue was virtually unchanged from the previous quarter at $3.2 billion, but is likely to grow 10% in the current quarter thanks in part to continued demand from hyperscalers like Meta Platforms. (GOAL) Google father Alphabet (GOOGL) and China-based TikTok owner ByteDance.
Improving ai growth forecasts
Broadcom said it expects sales for the current quarter to be around $14 billion, just below forecasts, with the full-year total at about $51.5 billion, just above its previous forecast of $51 billion.
Revenue at VMware, the cloud software group it bought for $61 billion in 2022 and shut down last year, is expected to hit a quarterly run rate of $4 billion.
“While the company's report was solid, with no material weak spots, its ai business lacked the clear bullish momentum Wall Street was looking for,” said Benchmark analyst Cody Acree, who reiterated his “buy” rating and $210 price target following last night's earnings report.
“Still, the company's results showed steady progress in its ai business (and) overall, we thought Broadcom delivered a solid report and outlook, with many points of fundamental strength that encouraged investors,” he added.
Morgan Stanley analyst Joseph Moore said Broadcom's ai growth, while not linear, remains strong, adding that the group's current forecast suggests flat growth for its ai products division.
Still, the analyst added $4 to his Broadcom price target, taking it to $180 per share, and maintained his “overweight” rating following last night's earnings report.
“We assumed there was conservatism in that and we had an estimate of $12 billion, but we highlighted in our preview that the company had characterized the ASIC business as uneven quarter-over-quarter,” Moore said.
“That unevenness was evident as the company saw ai processors flat on a quarter-over-quarter basis while ai networking increased slightly,” he added. “But importantly, growth remains close to tripling this year and sequential growth will resume in October.”
Strong demand from hyperscalers
Canto Fitzgerald analyst CJ Muse, who reiterated his $200 price target and “overweight” rating on Broadcom, said the ai revenue story remains compelling and the stock remains “one of the highest-quality ai stocks on the market.”
“ai revenue continues to grow strongly and with improving customer breadth in custom chips (from Google to now Meta Platforms and Bytedance accelerating) coupled with Ethernet networking growth closely tied to future GPU sales, FY25 should be another strong year for ai,” he added.
Goldman Sachs analyst Toshiya Hari was also optimistic about the group's long-term prospects, calling the third-quarter figures and guidance for the current quarter a “setback.”
Hari, who raised his price target for Broadcom by $5 to $190 a share, cited the group's “consistent” cash flow generation and “robust” competitive position in the high-speed networking space.
JPMorgan analyst Harlan Sur also raised his price target on Broadcom, taking it $10 higher to $210 a share while maintaining an “overweight” rating.
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“ai is everywhere in the enterprise, and as digital natives, you need to upgrade your servers,” Broadcom CEO Hock Tan told analysts on a conference call Thursday evening. “You need to upgrade storage, networking and connectivity across the ecosystem.”
“If anything, we could be heading into a recovery cycle, we're not sure of the exact timing, but a recovery cycle that could even match or even surpass our previous recovery cycles, simply because the amount of bandwidth that's needed, the amount to manage, store, manage all of these workloads that are coming out of ai would just require upgrading and upgrading the hardware,” Tan added.
Broadcom shares fell 7.9% in premarket trading to open at $140.75 each, a move that would trim the stock's six-month gain to about 4.3%.
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