Broadcom shares were rewarded Thursday evening after the chipmaker delivered the kind of quarterly beats and strong guidance needed to ease investor fears about a potential slowdown in artificial intelligence semiconductor spending. Revenue in Broadcom’s fiscal 2025 first quarter increased 25% year over year to $14.92 billion, beating the consensus forecast of $14.61 billion, according to estimates compiled by LSEG. Adjusted earnings per share increased 45% from the year-ago period to $1.60, which exceeded the $1.49 expected, LSEG data showed. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew 41% year over year to $10.08 billion in the quarter, beating the FactSet consensus estimate of $9.66 billion. AVGO 1Y mountain Broadcom 1 year Broadcom shares rose more than 12% in after-hours trading — erasing Thursday’s losses, and then some, and putting the Club name back above $200. The stock has been struggling over the past five weeks since Chinese startup DeepSeek’s efficient AI model came on the scene. Broadcom shares closed at a record high of $250 each on Dec. 16. Bottom line After a disappointing reaction to a solid quarter from Marvell Technology , whose stock closed down nearly 20% on Thursday, investors were bracing for a disappointment from Broadcom after the closing bell. What we got instead was a great quarter top to bottom, driven by better-than-expected AI-related and infrastructure software revenue, which also helped lift margins above guidance. The key section of the post-earnings conference call that sent the shares even higher was when Broadcom CEO Hock Tan revealed the company is engaged with two more hyperscaler clients to develop custom accelerators, also known as XPUs, to train their next-generation AI models. These potential customers are on top of the two that Tan said the company was engaged with on multiyear ramps across various technologies. All of this is in addition to the company’s three current customers that buying chips in volume. Those clients are widely believed to be Club names Alphabet and Meta Platforms — and more recently, TikTok parent ByteDance. The news of two new customer engagements should help ease some of the fears around AI spending. But it’s also a win for the kind of custom silicon that Broadcom makes versus the configurable but off-the-shelf graphics processing units, or GPUs, from our other portfolio chipmaker Nvidia . Importantly, the four potential Broadcom customers are not included in the company’s estimated serviceable addressable market, or SAM, for AI of about $60 billion to $90 billion by fiscal 2027. Broadcom originally shared this SAM on its last earnings call, and it’s looking more likely to be conservative. Why we own it Broadcom is a high-quality semiconductor and software company run by an incredible CEO in Hock Tan. The company is a big AI beneficiary through its networking and custom chip businesses. It also has a shareholder-friendly capital allocation strategy with its dividends and buybacks. Competitors : Marvell Technology, Advanced Micro Devices and Nvidia Last buy : Nov. 21, 2024 Initiation date : Aug. 24, 2023 One last thing is that Tan said he is too busy focusing on AI and VMware to think about mergers and acquisitions right now. We only mention it because it’s been reported that Broadcom had an interest in Intel ‘s chip design and marketing business, and the CEO is known for his prolific dealmaking. The positive stock reaction to Broadcom’s results probably isn’t the event that reignites the AI trade again. But it is a starting point. For that reason, we’re keeping our 2 rating and maintaining our $230 per share price target. The market is still trying to figure out several different uncertainties – like the impact of DeepSeek and whether clients of Broadcom and other chipmakers don’t need as much AI computing power as previously thought. Some of those fears, at least in the near term, were eased when Alphabet and Meta and fellow Club names Microsoft and Amazon kept their 2025 capital expenditures plans at robust levels. However, lingering worries about the long-term have recently pressured Broadcom and Nvidia. Commentary Broadcom’s Q1 semiconductor solutions revenue increased 11% year over year to $8.21 billion, exceeding expectations of $8.14 billion, according to FactSet. The company’s AI business drove the segment’s upside in the quarter with revenue increasing 77% year over year to $4.1 billion, beating guidance of $3.38 billion. The results topped management’s expectations due to stronger shipments of networking solutions to hyperscalers. Broadcom’s AI business is split into two different parts: custom AI accelerators and networking chips, which are effectively part of the “plumbing” of a data center and help various parts communicate as a larger computing factory. In the legacy semiconductor businesses, revenue fell 9% sequentially to $4.1 billion due to the seasonal decline in wireless, whose main customer is Club name Apple. Broadcom’s AI chip business is thriving, but the recovery in legacy continues to be slow and uneven. Broadband rebounded from its fiscal 2024 fourth quarter bottom to deliver a double-digit sequential recovery. It’s expected to be up similarly in fiscal Q2. Server storage revenue fell sequentially but is expected to improve in the high single digits in the second quarter. Enterprise networking is expected to remain flattish for the first half of the fiscal year due to customers working through channel inventory. Wireless revenues fell sequentially due to seasonal decline but were flat year over year. Wireless revenue in the fiscal second quarter is expected to be flat year over year again. Infrastructure software business reported a fiscal first quarter 47% year over year increase in revenue to $6.7 billion, representing a nice beat against the consensus estimate of about $6.5 billion, according to FactSet. Tan attributed the segment’s strong growth to converting VMWare’s perpetual licenses for compute virtualization to subscriptions, which they can upsell to its full stack VMware Cloud Services. This offering allows an entire data center to be virtualized and enables customers to create their own private cloud. VMware is also seeing strong demand for its Private AI foundation, which is in collaboration with Nvidia. “Customer demand has been driven by our open ecosystem, superior low balancing and automation capabilities that allows them to intelligently pull and run workloads across both GPU and CPU [central processing unit] infrastructure and leading to very reduced costs,” Tan said. Broadcom, which completed its $69 billion acquisition of VMware in November 2023, has been working diligently over the past 15 months to fully integrate it into the company’s value proposition. Outlook For its fiscal 2025 second quarter, Broadcom expects revenue to increase 19% from last year to $14.9 billion, which is above the Street’s consensus estimate of $14.7 billion, according to FactSet. Importantly, it expects AI revenue to increase sequentially to $4.4 billion. The legacy semiconductor business is expected to show flattish revenue growth in fiscal Q2, and software revenue is expected to increase 23% year over year to $6.5 billion. Profitability looks good too. Management expects adjusted EBITDA to be approximately 66% of projected revenue, or $9.83 billion. That beats the consensus estimate of $9.5 billion, according to FactSet. The strong margins comes even as the company said it is increasing its research and development investments to create the next generation of accelerators and increase the capacity of its Tomahawk 5 high bandwidth network switches. “These R & D investments are very aligned with the roadmap of our three hyperscale customers as they each raise towards 1 million XPU clusters by the end of 2027,” Tan explained. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Broadcom CEO Hock Tan.
Lucas Jackson | Reuters
Broadcom shares were rewarded Thursday evening after the chipmaker delivered the kind of quarterly beats and strong guidance needed to ease investor fears about a potential slowdown in artificial intelligence semiconductor spending.
