Can the strength of Broadcom’s (AVGO) wireless business reverse the declining trend in its stock price? The company is set to report second quarter fiscal 2019 earnings results after the closing bell Thursday.
Although shares of the chipmaker has returned about 10% this year, it trails the 16% rise of the S&P 500 and the iShares PHLX Semiconductor ETF (SOXX), which has risen more than 20%. Meanwhile, AVGO stock has been under pressure in recent weeks, falling by as much as 21.5% from its April highs. Increased trade war tensions between the U.S. and China has been the main headwind for Broadcom, which — as with peers Intel (INTC), Micron (MU) and Nvidia (NVDA) — extracts a sizable portion of its revenue from China.
The company was seeing some weakness in China when it reported its results back in March, though the management had already accounted for that in its full-year guidance. As such, given the recent struggles of the stock price, to the extent the company can issue strong forward-looking commentary on Thursday, not only would that move Broadcom stock positively, it can alter the perception of the entire chip sector.
For the quarter that ended April, Wall Street expects the San Jose, Calif.-based company to earn $5.18 per share on revenue of $5.69 billion. This compares to the year-ago quarter when earnings came to $4.88 per share on revenue of $5.02 billion. For the full year, ending October, earnings are projected to rise 10% to $23.05 per share, while full-year revenue of $24.41 billion would mark a 17% increase year over year.
The company felt some revenue pains in the first quarter, owing to the ongoing slump in the smartphone market. First quarter revenue came to $5.79 billion. Although that was up about 9% year over year, it missed Street estimates by some $40 million. Weakness on the semiconductor solutions business, its largest segment, which posted 12% year-over-year revenue decline, was the biggest headwind. This offsets the revenue gain Broadcom recognized from its acquisition of mainframe software provider CA Technologies.
The company did beat, however, on the bottom line, reporting adjusted EPS of $5.55 per share, which easily cruised by consensus estimate by 32 cents. Wall Street will want to see these profit trends continue. The company is poised to benefit from its ongoing relationship with Apple (AAPL). On Tuesday we learned that Broadcom had inked a new contract to supply radio-frequency components and modules for the iPhone, iPad and Apple Watch.
“Apple intends, but is not required, to source all of its requirements for such [radio-frequency] front end components and modules from [Broadcom], provided that [Broadcom] is able to meet certain development, supply, and quality commitments,” the chipmaker said in a new regulatory filing on Monday.
Wall Street will want more clarification as to what this new agreement means and what sort of commitments Broadcom has from Apple. Roughly 25% of Broadcom’s net fiscal 2018 revenue came from Apple alone, Broadcom disclosed in its latest annual report. With concerns of slowing iPhone sales, which could impact Broadcom’s revenue, the company will want to assure investors that it can better diversify its revenue to offset any potential iPhone weakness.