AVGO jumps on earnings, dividend increase; Can it hold its gains?

Broadcom reported Q4 adjusted EPS of $1.42, surpassing analyst expectations of $1.39, on revenue of $14.05 billion, slightly below the $14.09 billion consensus. Semiconductor solutions revenue outperformed at $8.23 billion versus the $8.05 billion estimate, while infrastructure software revenue came in softer at $5.82 billion compared to $6.03 billion expected. AI-related revenue of $12.2 billion for FY24 slightly exceeded the anticipated $12 billion, reflecting robust demand in this key growth area.

The stock reacted positively to the results, rallying from $181 to $193 in initial trading, driven by a better-than-feared Q1 revenue outlook and strong Q4 performance. However, some of these gains were given up ahead of the earnings call, as investors digested guidance and sought further clarity. The volatility suggests mixed sentiment, with optimism around AI and capital return plans tempered by concerns about broader growth dynamics.

Broadcom’s Q1 FY25 guidance projects revenue of $14.6 billion, above the $14.57 billion consensus, and adjusted EBITDA of 66% of revenue. This outlook reflects continued AI-driven strength, as the company benefits from growing demand for its AI XPUs and Ethernet networking solutions, particularly from cloud providers investing heavily in generative AI infrastructure. CEO Hock Tan expressed confidence in maintaining momentum into 2025, citing stabilization in non-AI segments and VMware synergies.

The company also increased its quarterly dividend by 11% to $0.59 per share, marking the 14th consecutive annual dividend hike since its inception in 2011. With a target annual dividend of $2.36 per share, Broadcom continues to prioritize shareholder returns, supported by strong free cash flow of $5.48 billion in Q4, representing 39% of revenue. Capital expenditures of $122 million were below expectations, further highlighting efficient cash management.

Broadcom's margins remained a highlight, with adjusted EBITDA at $9.09 billion, or 65% of revenue, exceeding the $8.93 billion estimate. Adjusted operating income of $8.81 billion also surpassed the $8.72 billion consensus. These results underscore the company’s ability to maintain profitability even amid significant investments in AI and other growth initiatives.

AI remains the primary growth driver, with FY24 AI revenue increasing 220% year-over-year to $12.2 billion, driven by strong adoption of Broadcom’s custom AI chips and networking gear. The company highlighted significant contributions from hyperscalers like Amazon, Microsoft, and Google. Additionally, non-AI semiconductor segments showed signs of stabilization, supporting a more balanced revenue mix in the longer term.

Despite strong results, the infrastructure software segment underperformed expectations, raising questions about VMware integration progress and potential near-term headwinds. However, management remains confident in achieving or exceeding VMware’s $12 billion annual run-rate target, driven by cost synergies and robust bookings growth.

In conclusion, Broadcom’s Q4 results and FY25 guidance reinforce its leadership in the AI and semiconductor space while demonstrating disciplined financial management. Although some challenges persist in software and non-AI segments, the company’s strategic focus on high-growth areas and commitment to shareholder returns position it well for continued success. The initial rally in the stock price reflects investor confidence, but ongoing scrutiny of its execution and broader market conditions will likely influence near-term performance.