Broadcom’s (AVGO) Profit Growth is Set to Accelerate as Software Revenue Rises

Stock (Symbol)

Broadcom (AVGO)

Stock Price

$162

Sector

Data is as of

Expected to Report

Company Description

Broadcom designs, develops and supplies a range of semiconductor and infrastructure software solutions.

It operates through two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions segment includes semiconductor solution product lines, as well as its Internet protocol (IP) licensing.

It provides semiconductor solutions for managing the movement of data in data center, telecom, enterprise and embedded networking applications.

It also provides a variety of radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market.

Its infrastructure software segment includes its mainframe, distributed and cyber security solutions, and its fiber channel storage area networking (FC SAN) business.

Its mainframe software provides DevOps, AIOps, Security and Data Management Systems solutions. Source: Refinitiv

Sharek’s Take

Broadcom (AVGO) saw strong revenue growth of 47% last quarter, driven primarily by its acquisition of VMware, which accounted for 29% of overall company revenue. Excluding VMware, Broadcom’s revenue growth would have been just 4%. AI semiconductor solutions also saw high demand, with AI-related products driving a 43% increase in networking revenue. AI accelerators and Ethernet switching products grew by 3.5x and 4x, respectively, year-over-year.

Broadcom is a semiconductor and software company that designs thousands of products for home connectivity, cloud data centers, and enterprise businesses. It is a conglomerate that was formed over 50 years of mergers and acquisitions including old-school tech companies AT&T/Bell Labs, Lucent, Hewlett-Packard and its semiconductor division, and younger industry leaders (including Broadcom, LSI, Broadcom Corporation, Brocade, CA Technologies and Symantec). The majority of AVGO’s silicon wafer manufacturing operations are designed in North America or Europe, then outsourced by the company to external foundries in Asia, such as Taiwan Semiconductor.

Broadcom’s method for building AI infrastructure is different, as its building a general product that fits everyone’s needs, with hardware from different manufacturers used in the datacenter:

• Broadcom feels it can make AI networks that are designed specifically for the customer that require less energy. Instead of using GPUs for AI, Broadcom utilizes application-specific integrated circuits, or ASICs, that use less energy.
• Broadcom refers to AI accelerators as XPUs instead of NVIDIA’s GPUs. Aspects os an XPU include:
  • compute (optimizing flow)
  • memory (the correct size, cooling, testing)
  • input/output (chiplets that match precision and ratio for workloads)
  • packaging (coded software to run like a machine)
• Within an AI server, there is essentially a network with 8 to 12 XPUs, ethernet devices, CPUs, and solid state hard drives. (much of this is manufactured by Broadcom already).

AVGO has two business segments:

• Semiconductor Solutions (sales up 5% last qtr, accounted for 56% of total sales): This segment offers digital and mixed signal products that use silicon wafers with computer memory. Products include routers, modems, set-top boxes, WiFi-enabled devices, Bluetooth devices, GPS systems, HDD and SSD storage, and motion control encoders. Its competitors include AMD, Cisco, GlobalFoundries, and Qualcomm.
  • Networking (sales +43% year-over-year, 55% of total semiconductor sales)
    • Growth was driven by strong demand from hyperscalers for AI networking and custom AI accelerators, with AI accelerators increasing 3.5x compared to the previous year​
  • Wireless (sales +1% year-over-year, 23% of semiconductor sales)
    • With the launch of next-generation devices and contributions from North American customers, wireless revenue was projected to grow over 20% sequentially, despite remaining flat year-over-year.
  • Server/Storage (revenue declined -49% year-over-year, 8% of semiconductor sales)
    • AVGO expects modest recovery in the latter half of the year.
  • Broadband (sales -39%, 10% of semiconductor sales)
    • The decline was attributed to a continued pause in spending by telco companies and service providers. It is expected to reverse in late 2024 with a full recovery in 2025.
  • Industrial (sales -31%, 3% of semiconductor sales)
• Infrastructure Software (sales up 200%, accounted for 44% of total sales): This division provides businesses with software to integrate, optimize and secure their operations, including Symantec software that protects organizations from cyber threats. Broadcom just closed its deal to acquire VMware, which provides multi-cloud services for all software apps, virtual technology, and x86 server-based computing. The acquisition of VMware took Broadcom’s software segment from around 25% of company revenue to around 45 %.
  • With respect to infrastructure software, revenue contribution from consolidating VMware a jump in revenue by 200%.

The great thing about AVGO stock is the company is making good profits and the stock is reasonable with a P/E of 33. The Estimated Long-Term-Growth (LTG) Rate is 18%. AVGO also pays a nice dividend of 2%. Management even buys back stock. The company buys back stock and has a dividend policy of pacing 50% of the prior-year’s free cash flow to investors. In late 2023 management increased the dividend 4% to a targeted $21 for Fiscal 2024, the 13th consecutive year of increases. AVGO’s dividend has grown from $1.94 in 2016 to $21.00 in 2024, a growth rate of 20% a year. AVGO is part of the Growth Portfolio.

One Year Chart

AVGO dropped after earnings as management lowered this qtr’s revenue outlook a little bit.

This stock has a 26 P/E when we look to 2025 profit estimates. A 26 P/E is reasonable for this stock, in my opinion. The P/E was 38 last qtr.

The Est. LTG is 20%, up from 18% last qtr.

AVGO has had been in a slow profit growth period and growth is expected to accelerate next quarter.

Earnings Table

In terms of segments:

• Semiconductor: 56% of total revenue, +5% growth.
• Software: 44% of total revenue, +200% growth.

Growth was driven by Infrastructure Software segment with +200% growth, which includes VMware. In semiconductor segment, growth was mainly driven by network revenue which grew 55% driven by strong demand from custom AI accelerators at AVGO’s two hyperscale customers. Ethernet switching, driven by Tomahawk 5 and Jericho3-AI, grew over 4x year-over-year, while optical lasers and PIN diodes used in optical interconnects tripled.

Annual Profit Estimates increased this qtr. 

Qtrly Profit Estimates for the next 4 qtrs are 24%, 34%, 36%, and 26%. These are excellent numbers! For next qtr, analysts expect revenue to grow 44% due to VMware’s addition.

Fair Value

Notice AVGO has a 33 P/E when we calculate it using 2024 profit estimates.

When we look at 2025 estimates and estimate a 35 P/E, we get a $216 Fair Value, around 34% higher than the recent quote of $162.

Bottom Line

Broadcom (AVGO) has a great looking ten-year chart. Recent success made the shares go parabolic, so I’m glad to see the stock consolidating here.

Companies are buying into this strategy of building their own AI networks, and Broadcom can make that happen. So this is an AI stock that’s under the radar for many investors.

AVGO drops from 20th to 11th in the Growth Portfolio Power Rankings.

I will also add the stock to the Aggressive Growth Portfolio where it will rank 5th in the Power Rankings due high profit growth expected the next four quarters and low P/E of 26 which gives the stock plump upside.

Power Rankings

11 of 32

Aggressive Growth Portfolio

5 of 16

Conservative Stock Portfolio

N/A