Broadcom reported an earnings beat Thursday, driven by strong sales of its AI products and VMware software. But management’s guidance for the current quarter disappointed investors, sending shares of the chipmaker down nearly 7% in the after market. This is too harsh of a reaction to an otherwise solid print. Revenue increased 47% year over year to $13.07 billion, beating analysts’ forecasts of $12.97 billion, according to estimates compiled by LSEG, formerly Refinitiv. Excluding the contribution from VMWare, Broadcom’s sales rose 4% year over year. Adjusted earnings per share (EPS) grew 18% from last year to $1.24, which exceeded expectations of $1.20. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $8.22 billion in the quarter, beating the $7.8 billion predicted 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 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 Bottom line Broadcom continues to deliver on our thesis. Its AI-related business continues to grow at a fast clip and the increase to the full-year outlook further proves this is one of the best AI chip stories in the market. The VMWare integration is also performing incredibly well, but we always had little doubt since the company has an excellent track record of acquiring strong businesses that can generate both revenue and cost synergies. The only weakness in the story right now is in the legacy semiconductor business. But CEO Hock Tan said on the earnings call that in aggregate its markets have reached a bottom and are on the road to recovery. When asked about how big the recovery could be during the Q & A section, Tan sounded confident about it returning at least to prior levels. “And like all previous cycles, my sense … is we will get up back to the level we used to be. There’s no reason at all why it doesn’t,” he said about the non-AI semi business. “And given the rate of booking … I dare say, even put a thought in your mind that as AI permeates enterprise, enterprises all across digital natives, you need to upgrade service. You need to upgrade storage. You need to upgrade networking, connectivity across the entire ecosystem,” Tan explained. Although Tan was hesitant to provide a timing around the next upcycle, he said it could meet or even surpass prior cycles because of the storage and workload needs of AI computing. The investment thesis for Broadcom is intact: AI revenues are strong, non-AI semi revenues…
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