Analysts: Broadcom's Reduced Outlook Due More To Caution Than Broader Weakness

Broadcom Inc AVGO reported Thursday after the close with below-consensus second-quarter revenue and also cut its full-year forecast, sending the stock lower. 

The Analysts

Raymond James analyst Chris Caso reiterated a Market Perform rating on Broadcom.

Morgan Stanley analyst Craig Hettenbach maintained an Equal-weight and reduced the price target from $262 to $250.

Credit Suisse maintained an Outperform rating and $320 price target.

Charter Equity Research analyst Edward Snyder downgraded the shares from Buy to Market Perform

KeyBanc Capital Markets analyst John Vinh maintained an Outperform rating and reduced the price target from $350 to $310.

Raymond James: Quarterly Print A Preview For Sector Earnings 

Broadcom significantly lowered its semiconductor guidance for the year, and it was attributable in part to the Huawei export ban, Caso said in a Thursday note.

Much of the shortfall is due to broader market weakness across all market segments since the start of the quarter, which was aggravated following the Huwaei ban, the analyst said. 

Broadcom no longer expects a recovery in the second half of 2019, he said. 

Caso sees Broadcom's report as a preview of what is to come when other semiconductor suppliers report their earnings in July.

Broadcom had some catching up to do, as it did not reduce its outlook last quarter, he said. 

See also: Analysts Discuss Broadcom's New Supply Agreement With Apple

Morgan Stanley: 'We Never Bought Into The 2H Snapback Narrative'

Broadcom's lower fiscal 2019 revenue guidance implies a 15% cut to the second half, Hettenbach said in a Friday note. 

Headwinds across the company's key markets — networking, storage, smartphones — have caught up to the chipmaker, the analyst said. Customer inventory reductions could also weigh on Broadcom, he said.  

Yet the company's margin performance is commendable thanks to strong execution on opex and higher-margin software revenue, Hettenbach said. 

"For the industry read through, we never bought into the 2H snapback narrative and this report should quiet such calls." 

Credit Suisse: Broadcom Messaging A Desire To Be Conservative

Broadcom effectively maintained its infrastructure software growth guidance, but reduced its semiconductor growth guidance from an above-seasonal 25% for the second half to 7%, according to Credit Suisse. 

The company apparently wants to relay its intention to be conservative, the sell-side firm said. 

Credit Suisse lowered its revenue and EPS estimates for fiscal years 2019 and 2020.

Charter: Broadcom Capturing Next Wave Of Tariffs In Guidance

Broadcom's customers began stocking inventory expecting a demand recovery in the second half, Snyder said in a Friday note. 

The Huawei business likely reached $1 billion in fiscal 2019 versus $900 million in 2018 due to an inventory build ahead of the ban, the analyst said. 

This — along with newfound caution among enterprise networking customers, telecom service providers and Chinese cloud centers — was mostly responsible for the reduced guidance, he said. 

"Management believes that ex-Huawei, lower guidance is more a reflection of discretion than softening end-demand, but conservatism compels it to capture the impact of the next wave of tariffs in current guidance." 

KeyBanc: M&A Benefits Could Cushion EPS Downside

The guidance cut reflected the Huawei ban and the recent increase in tariffs to 25%, as broad-based weakness is causing customers to take a more cautious view of the second half, Vinh said in a Thursday note. 

KeyBanc believes benefits from the CA Technologies acquisition will limit EPS downside in the current downturn, the analyst said. 

Vinh said he also likes the company's long-term opportunities in the wireless and data center segments. 

The Price Action

Broadcom shares were down 5.57% at $265.93 at the close Friday. 

Related Link: Chips Stocks Rattled As Companies Halt Supplying China's Huawei