Broadcom Earnings: AI Is Driving Growth and VMware Looks Closer to Completion

Broadcom Stock at a Glance

• Fair Value Estimate: $815.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Broadcom Earnings Update

We have raised our fair value estimate for Broadcom AVGO to $815 per share from $790, as we raise our probability of the VMware VMW acquisition closing to 75%, from 50% previously. Our greatest concerns for the deal had been the U.K. and U.S. jurisdictions, and Broadcom has now gained approval in the United Kingdom and faces no legal challenges in the United States. We see China as the final regulatory hurdle.

The recent surge in artificial intelligence spending at cloud hyperscalers is generating terrific growth for Broadcom’s networking chips, overshadowing softness in some other semiconductor markets. We remain impressed with the firm’s networking portfolio and its ability to execute with its customers, but we continue to see its current valuation as outpacing its fundamentals. We advise investors to wait for a pullback.

Fiscal third-quarter sales rose 5% year over year and 2% sequentially to $8.9 billion, in line with guidance. Networking continues to be Broadcom’s growth driver, rising nearly 20% year over year to $2.8 billion. Networking houses most of Broadcom’s AI exposure, with both its high-speed merchant silicon and its custom offload processors for Google growing rapidly. Other portions of Broadcom’s semiconductor exposure are seeing softer demand, in part due to inventory reductions, but we’re pleased to see sales remain stable. Storage, broadband, and wireless chip sales all grew modestly year over year. Software sales rose 5% year over year, driven primarily by upselling and cross-selling within Broadcom’s small group of strategic customers.

Profitability was solid in the quarter, with non-GAAP operating margin rising 100 basis points year over year, primarily behind higher volumes. Broadcom’s excellent profit margins are a key example of its engineering prowess and resultant pricing power that undergirds its wide moat.