Stock Story -
What Happened: Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) jumped 11.5% in the afternoon session as the major indices soared (Nasdaq up 3%, S&P up 2%) while yields declined after the Federal Open Market Committee kept interest rates unchanged at 5.25% to 5.50% following the July 2024 policy meeting.
However, a more important factor driving the rally is related to Fed Chair Jerome Powell's dovish comments, which revealed the committee's readiness to begin cutting rates as additional data confirms inflation is under control. The Fed Chair added, "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks.
We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
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 13 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 about 2 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 47.4% since the beginning of the year, but at $160.05 per share it is still trading 12.5% 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 $5,517.
