Broadcom, Inc. (AVGO) My Analysis

Broadcom, Inc. (AVGO) has emerged as a major player in the AI ​​semiconductor market, positioning itself alongside Nvidia.

Although it doesn't produce GPUs or large language model software, Broadcom's strategic focus on connectivity solutions has paid off.

Broadcom classifies its artificial intelligence-related products into two categories. AI ASICs (application-specific integrated circuits) and AI-driven networking solutions (such as high-speed interconnects).

By focusing on open technologies and scalability, Broadcom provides high-speed, low-cost connections between a variety of processors (XPUs) used in AI workloads.

Broadcom is one of the few companies that produces chips for both internal connectivity (within AI systems) and high-speed external connections.

JPMorgan is underscoring Broadcom's potential dominance in the high-end custom chip market. In particular, in the application-specific integrated circuit (ASIC) segment, Broadcom can play an important role. The market size for high-end ASICs is expected to reach $20 billion to $30 billion, exceeding previous estimates.

Broadcom announced its second quarter results, ending in May.

It beat expectations with Non-GAAP EPS of $10.96 (up $0.12) and revenue of $12.5 billion (up $480 million).

The company announced a dividend of $5.25 per share and a ten-for-one stock split effective July 15, 2024.

Full-year sales expectations were raised to $51 billion, beating the consensus estimate of $50.28 billion.

The semiconductor solutions segment accounted for 58% of sales, reaching $7.2 billion. Infrastructure software brought in $5.3 billion, resulting in net revenue of $12.5 billion.

Total sales increased 43% (including VMware) and 12% excluding VMware compared to the previous year. (Broadcom acquired VMware in late November 2023 for approximately $69 billion in cash and stock.)

GAAP gross margin increased to 63.7%, while non-GAAP gross margin reached 76.2% (up 60 basis points annually and 90 basis points quarterly).

Although operating margin remained below last year, it increased from 17.4% in the 1st quarter to 23.7% in the 2nd quarter.

Post-acquisition cost reduction efforts are reflected in the reduction in selling, general and administrative expenses. But the risk will come from large debt ($70 billion) and dwindling cash ($9.8 billion), especially if revenues decline.

Operations generated $4.6 billion in cash in the quarter. Free cash flow accounted for 36% of sales. There were no share buybacks this quarter, which is a positive sign that the focus is on debt repayment.

My comment: While Nvidia powers AI, Broadcom ties processors together, making its hardware indispensable for AI operations.

Broadcom's financial strength allows it to invest significantly in the development of future products. The company allocated approximately $4 billion to R&D in the last 12 months. This investment has paid off, as evidenced by the company's high non-GAAP gross margin.

I do not have any investment in Broadcom. But it is certain that he will be one of the important players of the artificial intelligence revolution.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.


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