Stock Story -
What Happened: Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) fell 10% in the morning session after the company reported second-quarter earnings results. Its revenue guidance for next quarter was underwhelming, and its inventory levels slightly increased. The market was also somewhat disappointed by the performance of its AI business, with revenue in the segment flat compared to the previous quarter.
On the other hand, Broadcom beat analysts' EPS expectations during the quarter. Its gross margin also improved. Zooming out, we think this was a decent quarter featuring some areas of strength, but guidance is weighing on shares.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Broadcom? Find out by reading the original article on StockStory, it’s free.
What is the market telling us: Broadcom’s shares are quite volatile and over the last year have had 19 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock gained 15.1% on the news that 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. Zooming out, we think this was a great quarter, showing it's staying on track.
Broadcom is up 27.8% since the beginning of the year, but at $138.71 per share it is still trading 24.2% below its 52-week high of $182.89 from June 2024. Investors who bought $1,000 worth of Broadcom’s shares 5 years ago would now be looking at an investment worth $4,752.
