Growing concerns about shrinking lead-times and declining revenue trends have pressured the semiconductor sector for most the year. And Broadcom (AVGO), despite consistently beating earnings expectations over the past two years, hasn’t escaped the downturn, particularly given the company’s reliance on consumer-facing segments like smartphones and broadband.
But after taking a massive hit over the past several months, chip stocks have come roaring back over the past several weeks, rising along with the rest of the tech sector on optimism that a recession might be averted. This has sent the iShares Semiconductor ETF (SOXX) up almost 20% in thirty days. One of the biggest movers has been Broadcom, which has also seen its shares rise almost 20% in thirty days. Will this resurgence in Broadcom stock continue?
The semiconductor giant will report fourth quarter fiscal 2022 earnings results after the closing bell Thursday. Despite the recent rise Broadcom shares, which have fallen 17% year to date, compared to the 14% decline for the S&P 500 index, still has some climbing to do. 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 and diversifying its business away from its core semiconductor segments. The company’s $61 billion acquisition of VMware is the latest example. 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. For the stock to continue its uptrend, it will take upbeat revenue guidance and datacenter results to continue the cement that growth thesis.
For the quarter that ended October, Wall Street expects the the San Jose, Calif.-based company to earn $10.28 per share on revenue of $8.90 billion. This compares to the year-ago quarter when earnings came to $7.81 per share on revenue of $7.41 billion. For the full year, earnings are projected to rise 33.6% year over year to $37.44 per share, while full-year revenue of $33.18 billion would rise 20.9% year over year.
There are several reasons to expect Broadcom’s outperformance to continue, particularly on the heels of the deal for VMware. 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 Advanced Micro Devices (AMD), but the company 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 third quarter as revenues of $8.46 billion rose 25% year over year, beating Street expectations by almost $60 million.
The company also beat on the bottom line, delivering adjusted EPS of $9.73, higher than the $9.55 analysts were looking for. Of the revenue total, Semiconductor solutions revenue rose 32% year over year, while Infrastructure software revenue rose 5% year over year. During the quarter, the company repurchased and eliminated 3.2 million shares, spending roughly $1.8 billion. It was an impressive quarter all around. But for the stock to continue its uptrend, Broadcom on Thursday will need to show revenue and profit growth acceleration and speak confidently about fiscal 2023.
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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