Strong tech earnings, which have smashed Wall Street’s expectations, have not prevented the selloff in high-growth stocks, suggesting the valuation argument has become front-and-center amid rising inflation fears. But the selloff hasn’t impacted Broadcom (AVGO) which trades near 52-week highs.
The semiconductor giant will report second quarter fiscal 2021 earnings results after the closing bell Thursday. After taking a massive hit earlier in the year from the pandemic, Broadcom stock has been one of the strongest beneficiaries from the rebound in the chip sector has that occurred in the past six months. The shares have risen almost 16% during that span, besting the 14% rise in the S&P 500 index. Broadcom’s revenue diversification have insulated its business, helping it better navigate supply chain impacts from the pandemic.
Though it is known for making chips for wireless, broadband, networking, enterprise storage and industrial applications, Broadcom's transition towards software and other services has been one of the key reasons that its full-year revenue and earnings growth are trending higher despite the pandemic. With its focus also shifting to datacenter growth, which accounts for 35% of total revenue, the market also appreciates the company’s other fundamentals and growth strategies, including its mission to become the world leader in infrastructure technology.
To that end, the company, having amassed a strong portfolio of services, particularly given its 5G capabilities, has gone on an acquisition spree to expand its business beyond its core semiconductor segments. With recent deals for CA Technologies and Symantec Enterprises, Broadcom has tons of mainframe and security firepower. But for the stock, it will take upbeat chip revenue guidance and datacenter results that excites the market. And any optimism in the surrounding 5G potential in the quarters ahead will be icing on the cake.
For the quarter that ended April, Wall Street expects the the San Jose, Calif.-based company to earn $6.42 per share on revenue of $6.51 billion. This compares to the year-ago quarter when earnings came to $5.14 per share on revenue of $5.69 billion. For the full year, ending in October, earnings are projected to rise 21% year over year to $26.89 per share, while full-year revenue of $26.85 billion would rise 12.4% year over year.
The contributions from the acquisition of Symantec and CA Technologies, particularly given their high margin qualities, are part of the reasons Broadcom’s full-year profits are projected to rise 21%. What’s more, these collective businesses, part of the infrastructure software segment, which now accounts for 27% of revenues, demonstrate superior customer loyalty and yielding 90% of recurring revenues and high margins.
In the First quarter, revenues of $6.66 billion, rising almost 14% year over year, surpassing Street expectations by $40 million. That level of growth showed a strong acceleration of almost three percentage points faster than the forth quarter. The company also beat on the bottom line, delivering adjusted EPS of $6.61, higher than the $6.57 analysts were looking for. Of the revenue total, Semiconductor solutions revenue rose 17% to $4.91 billion, while infrastructure software revenue of $1.75 billion rose 5%.
Last but not least, Broadcom also demonstrated its cash-generating prowess, delivering cash flow of $3 billion. On Thursday the market will want to see improved performance in all of these areas, particularly eager to see whether the Semiconductor solutions business can repeat its strong Q1.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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