Broadcom (AVGO +4.69%) shares are taking a hit after investors were disappointed by the chipmaker's fiscal fourth-quarter guidance. Expectations going into the quarter were quite high, but the reported results led to a 10% drop in share price.
Despite the drop, the stock is still up about 62% over the past year as many investors remain excited about the tech stock's potential. Let's dive into the company's most recent quarterly results to see if now is a good time to buy the stock on the dip.
NASDAQ: AVGO
Key Data Points
AI and VMware continue to lead the way
Right now, revenue related to artificial intelligence (AI) chips and networking components as well as VMware are working for Broadcom, but beyond that, the rest of its business segments are struggling. For its fiscal 2024 third quarter (ended Aug. 4), Broadcom saw overall revenue soar 47% year over year to $13.1 billion. When you exclude its VMware segment (acquired last November), revenue rose just 4%.
Semiconductor solutions revenue rose 5% year over year to $7.3 billion. Within this segment, networking revenue surged 43% to $4 billion, with custom AI accelerators revenue growing 3.5 times. However, the rest of its semiconductor businesses put up relatively lackluster numbers.
Wireless revenue increased 1% year over year to $1.7 billion, while server storage connectivity revenue sank 25% to $861 million and broadband revenue plunged 49% to $557 million. The company continues to expect these areas to be weak in fiscal Q4 as well, although it is looking for a sequential improvement in its wireless and server storage segments.
Infrastructure software segment revenue soared 200% to $5.8 billion largely due to VMware adding $3.8 billion to the total. VMware's contribution was up from $2.1 billion in Q1 and $2.7 billion in Q2, and it is closing in on the company's projected $4 billion quarterly run rate. Broadcom is in the midst of moving VMware to a subscription licensing model, which it said is progressing well. Excluding VMware, however, it looks like Broadcom's software revenue would have only been up about 3%.
Turning to profitability metrics, Broadcom's adjusted earnings per share in the quarter rose from $1.05 to $1.24, adjusting for its prior 10-for-1 stock split. That was ahead of the $1.20 analyst consensus.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, climbed 42% year over year to $8.2 billion. The company produced nearly $5 billion in cash flow from operations in the quarter, with free cash flow of $4.8 billion. It finished the period with nearly $10 billion in cash and equivalents and $70 billion in debt as a result of its $69 billion acquisition of VMware.
Looking ahead, management forecast fiscal Q4 revenue to be approximately $14 billion (in line with analysts' consensus estimate). It is looking for adjusted EBITDA to be about 64% of revenue, which would equal about $9 billion. For the full year, it now expects revenue to be $51.5 billion, which is up from its previous guidance of about $51 billion.
Broadcom management said that AI-related revenue would now be about $12 billion for the year, up from a prior outlook of $11 billion.
Image source: Getty Images.
Is the Broadcom sell-off an overreaction?
Broadcom's AI-related businesses are performing very well. The company's networking components, including switches and network interface cards, are an important part of building graphic processing unit (GPU) clusters. Meanwhile, it also makes custom chips (application-specific integrated circuits, or ASICs) for hyperscale customers who want customized silicon to have more control and run specific AI workloads more efficiently.
However, the rest of Broadcom's business segments outside of VMware have not been performing well. Many have been huge drags on the company's overall growth given their declines. These businesses can be more cyclical in nature, but they are in down cycles right now.
AVGO PE Ratio (Forward 1y) data by YCharts
Following the drop in its stock price, Broadcom now trades at a forward price-to-earnings (P/E) ratio of under 23. That is somewhat higher than its recent average but it isn't overly expensive and the company does have some potential catalysts. It previously announced a number of new AI ASIC customers, so that could help power a lot of growth in the coming years. Meanwhile, as AI models need more computing power and GPUs, the networking piece of the GPU cluster that ties everything together should become more important to the benefit of Broadcom.
And with its other businesses more cyclical in nature, they should eventually bottom and then begin to pick up. VMware is also a solid business that has been growing nicely.
Overall, there was nothing in the earnings report or its guidance that changes Broadcom's positive trajectory. Given that, I would take advantage of the dip and be a buyer of the stock at current levels.
