Broadcom Stock Surges 5.25% on Robust Earnings and AI Demand Growth

Broadcom (AVGO) shares have risen by 5.25%, marking a two-day increase of 8.19%.

Recently, Broadcom released its FY2024 Q3 earnings report. According to its CEO, the company's consolidated net revenue for the quarter was $13.1 billion, reflecting a 47% year-over-year increase. Operating profit saw a 44% rise. Specifically, the Semiconductor Solutions segment generated $7.3 billion in revenue, which accounts for 56% of the total revenue for the quarter, marking a 5% year-over-year increase. The gross margin for this segment stood at approximately 68%, a decline of 270 basis points largely due to a greater mix of custom AI accelerators. Research and development expenses surged by 11% to $881 million, resulting in an operating margin of 56% for the semiconductor division.

Broadcom indicated signs that the semiconductor industry has bottomed out. Excluding AI, non-AI semiconductor demand grew by 20% in Q3 and is forecasted to continue recovering in Q4. AI demand remains robust, with Q4 AI revenue anticipated to increase by 10% sequentially, reaching over $3.5 billion. This will drive FY2024 AI revenue to $12 billion, surpassing the previous projection of $11 billion.

For Q4, Broadcom projects semiconductor revenue to be around $8 billion, representing a 9% year-over-year increase. Infrastructure software revenue is expected to be approximately $6 billion. Consequently, the company anticipates Q4 consolidated revenue to be around $14 billion, a 51% year-over-year growth, which will propel FY24 revenue expectations to $51.5 billion, with adjusted EBITDA projected to account for 61.5% of total annual revenue.

During the Q&A session of the earnings call, discussions touched upon the detailed breakdown of AI revenues and whether the shift in market dynamics, such as NVIDIA moving its focus from large cloud service providers to enterprises, could impact Broadcom's revenue prospects. The company clarified that it remains concentrated on its core major cloud customer base, focusing on AI and XPU solutions, thereby seeing no significant shift in trends.

Moreover, inquiries about the performance of VMware and the traditional software business were addressed. VMware's subscription model continues to perform well, while Broadcom’s broader software business has stabilized, although specific divisions like Brocade have shown fluctuations.

The earnings call also explored AI semiconductor insights. Broadcom's management noted the ongoing transition towards custom AI chips, supported by a few substantial customers deploying production-grade accelerators in their AI data centers. This segment is expected to grow significantly as companies develop and train large language models (LLMs) using custom architecture solutions.

Lastly, the topic of Intellectual Property (IP) relocation to the U.S., resulting in a $4.5 billion tax expense this quarter, was clarified as a non-cash charge tied to the timing of IP migration unrelated to any asset sales. Broadcom reiterated its commitment to meet ascending AI demands, driven by orders from hyperscale cloud providers, while addressing potential supply constraints effectively.