Broadcom Now Owns VMware -- Will the Stock Continue to Soar in 2024?

Semiconductor designer and niche enterprise software provider Broadcom (AVGO 3.84%) is a big lumbering beast of a tech company. And with VMware now part of the operation, its software segment is a titan too. A company that expects to generate $50 billion in revenue next year -- roughly 60% from chip sales and 40% from software -- is a unique business and a type of all-in-one tech investment proposition.

Broadcom stock is up over 70% year to date. Will it continue to soar in 2024?

Broadcom's new financial reporting segments, explained

First, let's acknowledge Broadcom's great fiscal 2023 (the year ended Oct. 29, 2023). Networking revenue jumped 21% higher, driven by higher generative artificial intelligence (AI) chip sales. AI more than offset a flat wireless chip business (primarily supplying Apple), as well as offsetting a cyclical downturn that began to crop up in the second half of the year in enterprise compute, broadband infrastructure, and non-AI data center sales. The existing infrastructure software business (before the VMware acquisition was complete) had a stable year with sales rising 3%.

Data source: Broadcom. YOY = year over year.

In all, Broadcom's revenue increased 8% on the year, again mainly driven by AI chip sales. But the real story shareholders of this tech giant are following is the rising profitability. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose 10% in fiscal 2023 to $23.2 billion -- a whopping adjusted EBITDA profit margin of 64.8%! Free cash flow increased 8.1% to $17.6 billion.

But what of fiscal 2024? Excluding the approximately $12 billion in sales expected to be garnered from VMware, the acquisition of which was just completed in November, Broadcom expects revenue to be up a mid-single-digit percentage to about $38 billion. CEO Hock Tan said this will be driven by more AI chip growth (about 30% growth in networking chips overall), again offsetting a lack of growth everywhere else in the business.

As for VMware, it will be added to the existing infrastructure software business and is expected to haul in about $12 billion in revenue in 2024 -- for a grand total of $20 billion when adding the two existing software segments together. But VMware reported nearly $14 billion in stand-alone sales in its last reported 12-month period before being taken over. Why the expected decrease in 2024?

As Tan explained, non-core VMware cloud businesses will be divested over the course of the next year. Specifically, end-user computing and the endpoint cybersecurity unit Carbon Black (which VMware had acquired in 2019) will be sold off in some form or fashion. That explains the lower VMware revenue expectation.

Profitability should remain impressive, so the dividend was raised

For longtime Broadcom investors, though, this type of plan of divesting non-core business segments is par for the course. Tan's Broadcom is a serial acquirer, and it's been successful at doing so by hacking expenses and whittling its prizes down to the most profitable parts of the operation.

Though Broadcom will incur about $1 billion in expenses due to the VMware integration in the next year, management is still forecasting an approximately 60% adjusted EBITDA profit margin. It's a dip from the 64.8% just reported but still impressive. And given total expected revenue of $50 billion, it implies adjusted EBITDA will overall rise again to $30 billion, compared to $23.2 billion in 2023.

In response, Broadcom preemptively increased the quarterly dividend 14% to $5.25 per share. That implies a one-year forward annual dividend yield of 2.2% based on the stock price (as of this writing) of $944.

Paired with the company's habitual stock repurchases, Broadcom remains a great growth and income investment for the long term.

But will the stock continue to soar in 2024? I'm of the opinion some more modest returns lay ahead, versus the big rally for Broadcom in 2023. The valuation has risen to nearly 23 times trailing-12-month free cash flow (shares traded for just 13 times free cash flow this same time a year ago, which was a steal of a deal). Additionally, some cash expenses are to be expected in the short term as Broadcom sells off parts of VMware. This, as well as a no-growth environment for the chip business outside of AI, could put some pressure on the stock for now.

But while I don't think Broadcom is currently a best-buy semiconductor stock, I remain a very happy shareholder with a view to holding for the long term.