Broadcom Ahead of Q3 Earnings: To Buy or Not to Buy the AVGO Stock

Broadcom AVGO is set to report its third-quarter fiscal 2024 results on Sep. 5.

The Zacks Consensus Estimate for revenues is pegged at $12.9 billion, suggesting growth of 45.36% from the year-ago quarter's reported figure.

The consensus mark for earnings has been steady at $1.20 per share over the past 30 days, indicating 14.29% growth from the figure reported in the year-ago quarter.

Broadcom's earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average earnings surprise being 2.74%.

AVGO's fiscal third-quarter results will provide investors an opportunity to analyze the prospects of AI and Generative AI (GenAI). While continued momentum will boost investor confidence, any weakness that reflects the cooling of an AI-fueled rally can negatively impact Broadcom's share price movement.

Factors to Note Prior to AVGO's Q3 Earnings

Broadcom's fiscal third-quarter results are expected to have benefited from its expanding AI and Gen AI offerings. In the second quarter of fiscal 2024, AI revenues surged an astounding 280% year over year and are now expected to be more than $11 billion for fiscal 2024.

The Zacks Consensus Estimate for fiscal third-quarter Semiconductor Solutions revenues are pegged at $7.38 billion, indicating 6.3% year-over-year growth.

Broadcom's expanding clientele, which includes the likes of Alphabet and Meta Platforms, is noteworthy.

Alphabet is one of the large customers of Broadcom's application-specific integrated chips (ASICs). These chips are designed to support AI and machine learning and make these tasks more efficient. Meta Platforms has also become an important customer as it is using AVGO's ASICs to develop Metaverse hardware.

Strong results at VMware are expected to have driven top-line growth. Broadcom expanded its hybrid cloud portfolio with the acquisition of VMware in 2023. This has accelerated app delivery, enabled zero-trust security and delivered software-defined services to its customers.

Broadcom's focus is on shifting VMware products to a subscription-based model. AVGO has signed up approximately 3,000 customers to develop its own virtual private cloud on-premise infrastructure, which boosted Broadcom-owned VMware's Annualized Booking Value. This step increased VMware's annualized booking revenues by 41.7% sequentially to $1.9 billion in the fiscal second quarter.

Although rapid GenAI adoption bodes well for Broadcom's prospects, we expect sluggishness in the enterprise and telecommunication end markets to have hurt broadband growth. Weak demand for server storage connectivity solutions has been a concern.

AVGO Shares Outperform Sector YTD

Year to date (YTD), AVGO shares have returned 47%, outperforming the broader Zacks Computer & Technology sector's return of 19.6% and the Zacks Electronics - Semiconductors industry's gain of 24.2%.

Year-to-Date Performance

Image Source: Zacks Investment Research

The AVGO stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales ratio, Broadcom's shares are trading at 12.84X, higher than its median of 11.41X and the Zacks Electronics - Semiconductors industry's 6.37X.

P/S Ratio (F12M)

Image Source: Zacks Investment Research

Strong AI Portfolio Aids AVGO's Long-Term Prospects

AVGO's long-term prospects are expected to benefit from the growing demand for AI infrastructure and the robust deployment of the GenAI portfolio. Broadcom's solutions are suitable for addressing the needs of an increasing AI workload and the growing need for fast networking in data centers.

A solid portfolio is helping in expanding clientele that includes the likes of Alphabet and Meta Platforms. Its strong partner base, including Microsoft, Arista Networks, Dell Technologies, Juniper and Supermicro, has been a key catalyst.

Broadcom now expects fiscal 2024 AI revenues of more than $11 billion (higher than the previous guidance of $10 billion).

Server storage revenues for fiscal 2024 are expected to decline roughly 20% on a year-over-year basis. Broadband revenues are expected to be down high 30s year over year for fiscal 2024.

The strong portfolio has prompted Broadcom to raise guidance. For fiscal 2024, AVGO expects revenues of $51 billion (up from the previous guidance of $50 million) and adjusted EBITDA margin of 61% (up from 60%). The rise reflects the growing dominance of AVGO in the AI infrastructure market.

The Zacks Consensus Estimate for revenues for fiscal 2024 of $51.37 billion suggests 43.43% growth over fiscal 2023. The consensus estimate for earnings is pegged at $4.72 per share, unchanged over the past 30 days.

Conclusion

Broadcom's strong portfolio, along with an expanding partner base, surely reflects solid top-line growth potential over the long run.

However, sluggish broadband and server storage end-markets are expected to hurt prospects in the near term.

Broadcom currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock.

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