Broadcom Anticipates 21% Revenue Surge, AI Business Drives Growth

Broadcom Inc. (AVGO.US) is set to release its latest quarterly financial report on September 4, with market expectations pointing to a 21% year-over-year increase in revenue for the third quarter, reaching $15.82 billion. Earnings per share are anticipated to be $1.66, compared to $1.24 in the same period last year.

The spotlight of the market's attention is likely to be on Broadcom's artificial intelligence (AI) business. This segment generated $4.4 billion in revenue during the second quarter, marking a 46% year-over-year growth. The company projects that this figure will rise to $5.1 billion in the upcoming report. If these projections hold true, the AI business will account for approximately one-third of Broadcom's total revenue, marking the tenth consecutive quarter of year-over-year growth for this segment.

Investors will be closely monitoring the demand for AI chips to determine if the growth momentum is indeed slowing. The company's non-GAAP gross margin for the second quarter was approximately 79%, with an adjusted EBITDA margin of 67%. These figures underscore Broadcom's disciplined cost structure and its ability to expand in the AI semiconductor sector.

However, guidance for the third quarter suggests that the adjusted EBITDA margin may drop to 66%. This could lead to negative commentary suggesting that the growth rate has peaked and is set to decline. Nevertheless, even in such a scenario, Broadcom would remain at the higher end of the industry's profitability range.

The potential for strong performance in gross margins and EBITDA margins will be crucial in determining whether the stock can achieve short-term profitability. In the previous quarter, Broadcom's free cash flow reached $6.4 billion (or $22.6 billion over the past 12 months), representing over 40% of the company's revenue. This robust cash flow comfortably covers the quarterly dividend and enhances the prospects for future stock buybacks and debt reduction, especially following the $69 billion acquisition of VMWare.