AVGO Earnings Preview: AI progress and margins in focus

Broadcom is set to report its Q4 earnings on Thursday, December 12th, after the market close. Analysts expect adjusted EPS of $1.29 and revenue of approximately $14.0 billion, slightly below the $14.13 billion consensus. The company’s previously provided guidance for Q4 revenue of around $14.0 billion suggests continued AI-driven strength but with tempered gross margins due to the ramp-up of its AI accelerator business. Investors will also closely watch any updates on FY25 guidance and the trajectory of AI revenue, projected at $12 billion for FY24.

Key metrics to monitor include AI revenue growth and its contribution to semiconductor sales, which has been a major driver of Broadcom's performance. Analysts project AI revenue of $12 billion for FY24, with a split of $8 billion from custom ASICs and $4 billion from networking. Additionally, VMware is expected to maintain its growth trajectory, contributing $4 billion in Q4 and on track for $12 billion annually. Non-AI semiconductor segments, including wireless and storage, are recovering, with wireless poised for 20% quarter-over-quarter growth due to the iPhone 16 refresh.

Analyst sentiment going into the report is mixed. While firms like Citi and Cantor expect a modest beat on Q4 results, there is concern about muted guidance for the January quarter. A slowdown in orders from Google’s TPU program is seen as a potential headwind for Q1, though Meta’s increased orders and a broader AI ramp are expected to offset this in FY25. VMware’s synergies and non-AI semiconductor stabilization also provide a positive backdrop for Broadcom’s longer-term growth.

Broadcom's guidance will be pivotal in shaping investor sentiment. Analysts expect the company to reiterate its FY24 AI revenue target of $12 billion and provide a cautious path toward $15 billion in FY25 AI sales. Any commentary on the cyclical recovery of non-AI segments, including broadband and storage, and updates on Apple-related seasonality will be closely scrutinized. Despite short-term risks, the market sees significant upside tied to Broadcom’s leadership in AI and consistent execution in infrastructure software.

The stock reaction will likely hinge on the January quarter guidance. While strong Q4 results could bolster confidence, any signs of weakness in the January outlook, particularly from AI or Apple-related products, may weigh on shares. Broadcom remains a favored pick among analysts for its long-term AI and VMware growth potential, with price targets ranging from $190 to $205, implying meaningful upside from current levels. However, near-term headwinds could temper enthusiasm in the immediate aftermath of the report.

Broadcom's Q3 results exceeded analyst expectations, with adjusted EPS of $1.24 beating the $1.22 estimate and revenue of $13.07 billion slightly surpassing the $13.03 billion consensus. The company’s semiconductor solutions revenue fell short at $7.27 billion (vs. $7.41 billion estimate), but infrastructure software revenue was a standout, coming in at $5.80 billion, significantly above the $5.5 billion projection. Adjusted EBITDA also beat forecasts at $8.22 billion, compared to the $7.95 billion estimate.

The key drivers of Broadcom’s Q3 performance were robust demand for AI products and the integration of VMware. AI-driven revenue surged, with networking revenue growing by 43% year-over-year and custom AI accelerators and Ethernet switching products seeing exponential growth. VMware contributed $3.8 billion to infrastructure software revenue, marking a 200% year-over-year increase and exceeding initial expectations for adjusted EBITDA targets. However, non-AI semiconductor segments, such as storage and broadband, experienced double-digit year-over-year declines, though some showed sequential recovery.

Broadcom provided guidance for Q4 revenue of approximately $14.0 billion, below the $14.13 billion consensus. The company anticipates continued AI revenue strength, projecting FY24 AI sales to reach $12 billion, a threefold increase year-over-year. CEO Hock Tan expressed optimism about non-AI product recovery, with certain segments expected to stabilize or improve into 2025. However, the lower gross margin guidance for Q4, influenced by the ramp-up of its AI accelerator business, dampened some investor enthusiasm.

The stock reaction was negative, with Broadcom shares falling over 8% in premarket trading following the earnings release. Despite the robust growth in AI and VMware segments, the weaker-than-expected Q4 guidance and ongoing struggles in non-AI segments contributed to the selloff. Broader market pressures on semiconductor stocks also weighed on sentiment, with peers like NVIDIA and AMD trading lower in sympathy.

Broadcom’s long-term outlook remains positive, driven by its leadership in AI and the successful integration of VMware. While non-AI segments are recovering at varying paces, the sustained demand for AI products and services from hyperscalers, along with expected sequential growth in key non-AI categories, positions the company for stronger performance in FY25. However, near-term concerns over margin compression and weaker Q4 guidance continue to cloud the stock's immediate trajectory.