In the wake of last week’s hawkish comments from Federal Reserve Chairman Jerome Powell, semiconductor stocks were punished mercilessly, sending the iShares Semiconductor ETF (SOXX) down by almost 6%.
Although Broadcom (AVGO) stock has regained some key technical levels over the past thirty days, it ended last week down 3.5%. On the positive side, investors are now more optimistic about the prospects of chip stocks, driven by the likelihood that a recession can be averted. One of the biggest movers has been Broadcom, which has seen its shares rise as much as 17% since mid July from a closing price of $476.30 on July 5th to $556.10, besting the S&P 500 index during that span. There are reasons to expect this outperformance to continue.
The semiconductor giant will report third quarter fiscal 2022 earnings results after the closing bell Thursday. Having consistently beaten earnings expectations over the past two years, you would be hard-pressed to find a stronger management team within the chip space. On a mission to become the world leader in infrastructure technology, the company has gone on an acquisition spree, diversifying its business away from its core semiconductor segments. The company’s $61 billion acquisition of VMware is the latest example.
Aside from expertise in data center infrastructure, networking, and storage, the VMware deal exposes Broadcom to various applications such as cloud management, arming it with strong portfolio of high-growth services to drive revenue for years to come. That said, for the stock to maintain its uptrend, the company on Thursday will need to provide upbeat revenue guidance, while showing continued strength in the datacenter segment to cement the growth thesis.
For the quarter that ended July, Wall Street expects the the San Jose, Calif.-based company to earn $9.56 per share on revenue of $8.41 billion. This compares to the year-ago quarter when earnings came to $6.96 per share on revenue of $6.78 billion. For the full year, ending in October, earnings are projected to rise 31.88% year over year to $36.94 per share, while full-year revenue of $32.9 billion would rise 19.9% year over year.
Broadcom's transition towards software and other services has been one of the key reasons that its full-year revenue and earnings growth projections remain robust. Broadcom might not garner the attention Nvidia (NVDA) or AMD (AMD) often receives, but Broadcom has proven to be an equal beneficiary of the secular growth trends in various chip components solutions. While it is broadly known for making chips for wireless, broadband, networking, enterprise storage and industrial applications, the market has applauded the company’s high-growth and high-margin strategies.
Broadcom’s diversified revenue stream insulates the company from any adverse impact of a potential slowdown in the semiconductor industry’s growth. This was noticeable in the second quarter as revenues of $8.1 billion rose 22.5% year over year, beating Street expectations by $190 million. The company also beat on the bottom line, delivering adjusted EPS of $9.07, higher than the $8.72 analysts were looking for.
Of the revenue total, Semiconductor solutions revenue rose 29% year over year, while Infrastructure software rose 5% year over year. Within the semiconductor operations business, the networking business rose impressively at 44% year over year, thanks to strong demand for merchant switching and routing. This was surprising given the supply chain constraints that plagued the company. It was an impressive quarter all around. But for the stock to rebound, the company on Thursday will need to show revenue and profit growth acceleration and speak confidently about its supply chain being less of a headwind.
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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