Stock Story -
What Happened: Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) jumped 15.1% in the pre-market session after the company reported a "beat-and-raise" quarter. Broadcom exceeded analysts' revenue expectations and shrank its inventory levels. The revenue beat was driven by strong AI demand and VMware, a company it acquired in November 2023.
To provide some color on the AI front, AI revenues in the quarter clocked in at $3.1B, up 280% y/y, driven by strong Google (NASDAQ:GOOGL) TPU demand and AI networking revenue. This strong AI performance helped to offset cyclical weakness in semiconductor revenue from enterprises and telcos. The software segment also gained from the growing contribution from VMware, which is set to hit a $4B quarterly revenue run rate. In Q2’2024, VMware drove $2.7B in revenue (up from $2.1B in the previous quarter). Moving on, AI revenue in FY24 is expected to exceed $11B and grow over 150% y/y.
For the full year, revenue guidance ($50.5 billion at the midpoint) and EBITDA guidance (approximately 61 percent of projected revenue) topped Wall Street's estimates.
Similar to Nvidia (NASDAQ:NVDA), the company announced a 10-for-1 stock split, which will take effect once the market opens on July 15th. Zooming out, we think this was a great quarter, showing it's staying on track.
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What is the market telling us: Broadcom's shares are somewhat volatile and over the last year have had 9 moves greater than 5%. But moves this big are very rare even for Broadcom and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the company gained 7.7% as stocks rallied with the S&P 500 (+0.77%) and NASDAQ (+1.1%), making new 52-week highs to mark a strong start to the new month. Notably, sentiment within the tech space also benefitted from Dell's strong earnings, which highlighted growing demand for its computing solutions, especially its AI-optimized servers.
The company provided some color on the growing interest in its AI solutions, adding, "In Q4, we saw strength across a wider range of customers and geographies within an expanding pipeline. AI-optimized server orders increased by nearly 40% sequentially. We shipped $800 million of AI-optimized servers, and our backlog nearly doubled sequentially, exiting the fiscal year at $2.9 billion. Demand continues to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X."
Dell's comments demonstrated the strong interest in these highly specialized computing devices as well as the AI-optimized chips that power them, suggesting it is still early days for innovators within the AI space. This likely drove renewed optimism toward the stocks of some semiconductor manufacturers leading the race to supply AI chips and other related hardware.
Broadcom is up 56.9% since the beginning of the year. Investors who bought $1,000 worth of Broadcom's shares 5 years ago would now be looking at an investment worth $6,047.
