How Long Can Broadcom's Sizzling Revenue Growth Last? Here's What Investors Need to Know

Shares of Broadcom (AVGO -4.31%) have been an incredible investment over the last decade, handily beating both the market overall and the high-growth semiconductor industry. Total return (which includes dividends paid) sits at over 1,900%. The company has of course ridden the expansion of smartphones and cloud computing. But it also made a string of acquisitions that have turned the formerly Singapore-based (now San Jose, Calif.-based) chip designer into a giant in the tech world.  

Broadcom recently wrapped up its 2022 fiscal year (ended Oct. 30) on a high note but declined to provide full-year 2023 guidance. Its mega-merger with cloud software company VMware (VMW) is also being carefully scrutinized. How long can Broadcom's sizzling growth last?

A cyclical downturn, not completely unlike times past

The most important economic backdrop headed into Broadcom's fiscal fourth-quarter report was the ongoing downturn in the semiconductor space. Most notably, companies like Qualcomm have been reporting weakening sales as people pause on new smartphone purchases. Micron Technology is also hurting from the smartphone corner of the chip arena, as well as a slowdown in PC demand and from oversupply among some of its enterprise customers. And of course, chip stock darlings Nvidia and AMD are also working with retail partners to sell off excess inventory of their consumer-facing chips.

This current cyclical downturn has been steep as a two-year, pandemic-induced consumer spending spree comes to an end, made worse by China's floundering economy (Broadcom isn't affected by the recent U.S. export bans on chips to China). However, downturns like this present one are quite normal every few years for the semiconductor industry. Broadcom, like everyone else, has been to this rodeo before.  

But Broadcom appears to be shaking off many of the issues plaguing other parts of the industry. In fact, the latest results and outlook show a business that is still doing more than just fine, capping off a year with 21% sales growth and an incredible (but typical for Broadcom) free-cash-flow margin of 50%.  

Data source: Broadcom.

This chip stock has room to run

To kick off the new fiscal year, Broadcom does expect year-over-year growth in its semiconductor segment to cool off to an approximately 20% rate. The infrastructure software business is expected to be flat. In all, sales should be about $8.9 billion, in line with the Q4 financials. Broadcom is clearly outperforming many of its chip peers with a broad-based portfolio of designs addressing all number of communications markets. While the industry is in a slump, Broadcom appears poised to grow again in 2023.  

A note of caution, though: CEO Hock Tan said that while its semiconductor manufacturing partners are fully booked out for the next year, Broadcom still isn't going to provide any full-year fiscal 2023 guidance due to a high level of economic uncertainty. Tan isn't interested in counting eggs before they've actually hatched, even if they're in the incubator.  

Another item to keep in mind as 2023 gets rolling is that the VMware acquisition is still pending regulatory approval. The European Union in particular is reportedly about to begin a four-month-long antitrust review process on Dec. 20, 2022. Broadcom said other regulators, including in the U.S., will also likely extend their review process given the enormity of the takeover, though Tan said he's confident approval will ultimately be given.

The reason? Cloud companies like Amazon Web Services and Alphabet's Google Cloud have been dabbling in designing their own chips. If the cloud titans get to stomp on toes a bit, why can't Broadcom too? Time will tell.  

Despite economic issues and a general down cycle for other semiconductor companies, Broadcom is still growing and expects to continue to do so at a fast pace to kick off 2023, and it's wildly profitable. It also pays a dividend currently yielding 3.3%, and shares trade for a very reasonable 15 times trailing 12-month free cash flow (or 22 times trailing 12-month earnings per share). This is a top chip stock to buy and hold in my book.