Chipmaker Broadcom delivers on the metrics that count, proving its an AI winner to own

Published Thu, Mar 7 20248:34 PM ESTUpdated Thu, Mar 7 20248:40 PM EST

Broadcom reported better-than-expected fiscal first-quarter results Thursday after the bell. However, management's failure to increase full-year guidance — considering shares were red hot coming into the release— prompted some profit-taking. Still, nothing we heard Thursday night changes our belief that Broadcom is a major artificial intelligence winner and a stock to keep in the portfolio. Revenue in the three months ended Feb. 4 totaled $11.96 billion, outpacing analysts' forecasts of $11.72 billion, according to estimates compiled by LSEG, formerly Refinitiv. Sales were up 34.2% on an annual basis, helped in part by the inclusion of recently acquired VMWare. Excluding the partial contribution from VMWare, Broadcom's sales rose 11% year over year. Adjusted earnings per share (EPS) advanced 6% on an annual basis, to $10.99, which also exceeded analysts' expectations of $10.29 per share, LSEG data showed. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $7.16 billion in the quarter, beating the $6.64 billion predicted by Wall Street, according to LSEG. AVGO YTD mountain Broadcom's year-to-date stock performance. Bottom line Despite delivering a good quarter and affirming its standing in the AI arms race, shares dropped about 3% in extended trading. Perhaps that was to be expected, given the stock has climbed 26% so far in 2024. The concerns about Broadcom leaving its guidance unchanged are misplaced. As Broadcom's earnings call got underway, veteran CEO Hock Tan said the reiteration was due to better-than-expected outlooks for networking and artificial intelligence-related revenues being offset by steeper declines in the legacy parts of its business, such as broadband. That's a crucial distinction because investors are focused on AI revenues. We knew the legacy parts of the business weren't doing too hot, but the reason the stock has been awarded an earnings multiple above its historical average is because Broadcom is seen as the biggest beneficiary of growing AI adoption behind fellow Club holding Nvidia . After commentary on the call reaffirmed this dynamic, shares quickly recouped most of the losses seen immediately after the release, demonstrating the value of one of Jim Cramer's long-held investing rules : Wait until you've read the press release and heard the conference call before trading a stock on earnings day. Sure, shares of Broadcom are still down after-hours, but some profit-taking is to be expected when a stock has climbed 26% in a little over two months and more than 52% over the past three monthsed. The benefits of Broadcom's blockbuster acquisition of cloud software maker VMWare, which closed in late November after some delays, are already apparent. Management expects VMWare to see double-digit sequential revenue growth for the rest of the fiscal year as the company works to diligently to upsell customers and get them on the VMware Cloud Foundation platform. Ultimately, investors who dumped the stock Thursday night because Broadcom didn't raise its outlook may have been better off running to the store for a Coke. We got into Broadcom in August on the belief the chipmaker and software provider would be the biggest beneficiary of generative AI adoption after Nvidia. Thursday's results and conference call commentary only served to reinforce that view, as management now projects AI revenues to represent 35% of full-year semiconductor segment sales, up from the 25% revenue share previously expected. Moreover, VMware is supercharging Broadcom's software business. As a result, we are raising our price target o Broadcom to $1,550 a share, from $1,400. Nevertheless, we are maintaining out 2 rating — meaning, we'd wait for a pullback before buying more — because it's just not our style to chase moves like the blistering one we've seen lately in shares of Broadcom. Shares have set record after record this year. They hit an all-time high of $1,438.17 each on Monday. Outlook Broadcom on Thursday reiterated the full-year sales and EBITDA guidance it offered investors in December. Revenue in the 12 months ending Nov. 3 is expected to be $50 billion, while adjusted EBITDA — an alternative measure of operating profitability — is projected to be roughly 60% of sales. Both those forecasts came in slightly ahead of FactSet estimates — $49.8 billion in sales and $29.56 billion in EBITDA — but, as noted, some investors may have expected an increase to the guidance because first-quarter results topped estimates. We're hardly worried by that development, knowing it was tied to weakness in legacy businesses, such as server and storage connectivity, as well as broadband. The much-bigger deal is management expects AI revenues to be 35% of total semiconductor sales in fiscal 2024, translating to more than $10 billion, compared with its prior 25% expectation. One factor behind that bullish change: Tan said he now expects to see AI demand to drive full-year revenue growth in Broadcom's key networking segment of 35% on an annual basis, up from its prior guidance of 30% growth. Quarterly commentary Overall semiconductor segment revenues came up slightly short, but the most important consideration is AI-related sales quadrupled from the year-ago period, to $3.2 billion, according to Tan, who has led the company since 2006. Networking revenues, which benefit greatly from the buildout of AI computing infrastructure, jumped 46% on annual basis and now represent 45% of segment revenue. Driving the growth was "strong demand" for Broadcom's custom AI chips at "two hyperscale customers," the company said. One of those customers is known to be Google parent Alphabet , which uses Tensor Processing Units, or TPUs, co-designed by Broadcom for certain AI tasks. The legacy semiconductor businesses felt some pain in the quarter, as expected. Wireless : Sales fell 4% year over year and now represent 27% of semiconductor segment revenue. Management reiterated its expectation that full-year wireless sales will be flat compared with fiscal 2023. Server and storage connectivity : Sales tumbled 29% versus the year-ago period, making up 12% of segment revenue. On the call, Tan said Broadcom expects this business to rebound in the back half of the year, but only after a weaker-than-anticipated first half. The current weakness forced Broadcom to downwardly revise their full-year outlook for the sub-segment, with sales now expected to decline in the mid-20% range, compared with a high-teens percentage decline previously. Broadband : Sales fell 23% on annual basis, representing 13% of segment revenue in the quarter. Here, too, management said weakness in telecommunications spending forced them to reduce its full-year outlook. Broadcom now expects broadband revenue to be down 30% in fiscal 2024 versus the prior year, worse than the mid-teen percentage decline previously forecast. Finally, industrial : Sales fell 6% year over year and management continues to expect sales to end the year down high-single-digit percentage points compared with the prior year. As hoped, Broadcom's infrastructure software segment is seeing huge benefits from the addition of VMware. And that's expected to continue going forward. Capital expenditures were a bit higher than expected in the quarter, but that's of no concern given robust operating cash flow allowed free cash flow to come in well ahead Wall Street estimates. This strong cash generation allowed Broadcom to repurchase and eliminate 7.7 million shares, worth about $8.29 billion, and pay out $2.4 billion in dividends, while still paying down $3 billion in debt to date in 2024. (Jim Cramer's Charitable Trust is long AVGO. 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 charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A sign is posted in front of a Broadcom office in San Jose, California, June 3, 2021.

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