Broadcom Earnings: AI Growth and VMware Integration Align With Our Thesis Valuation

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $155.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Earnings

We maintain our $155 fair value estimate for shares of Broadcom AVGO, and our long-term growth thesis is intact. Artificial intelligence continues to drive the firm’s organic growth in fiscal 2024, supplemented by the inorganic addition of VMware. Non-AI semiconductor revenue remains weak, but we have increasing confidence that these non-AI chip markets will rebound over the coming quarters.

Broadcom’s fiscal third-quarter results and fiscal fourth-quarter guidance were in line with our expectations. We still expect strong growth over the next five years, driven by AI chip demand, VMware, and rebounding non-AI chip markets. Shares dipped about 6% after hours on guidance, lightly missing Factset consensus expectations, leaving them fairly valued.

July-quarter revenue rose 5% sequentially to $13.1 billion. As reported, that implies 47% growth year over year, including VMware’s inorganic contribution. Organically, revenue rose 4% year over year. AI chip revenue again drove the organic growth, and we continue to see strong adoption of Broadcom’s custom accelerators and merchant networking chips. Weaker demand and inventory reductions in the storage, broadband, and industrial chip end markets have partially offset strong organic AI chip growth, but management positively guided for sequential growth in the October quarter, and we project multiyear rebounds to start meaningfully in fiscal 2025.

October quarter guidance was in line with our expectations. Broadcom is guiding for $14 billion in sales, implying a sequential growth acceleration to 7%. We expect another step up for AI revenue, along with recoveries in cyclically depressed chip markets, to drive growth. We are pleased Broadcom is on track with its integration of VMware and cost reductions, with guidance calling for a 64% non-GAAP EBITDA margin in the October quarter, in line with levels before the acquisition.