For Broadcom, Outperformance Is Just Another Day At The Office


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In the not-always-rational world of Wall Street, I’m truly a bit stunned that the Street hasn’t adopted extra of an expectation of ongoing beat-and-raise quarters from Broadcom (NASDAQ:AVGO). Then once more, provided that outlooks are withering at many peer semiconductor corporations, I suppose that there is little inclination to look a present horse within the mouth.

Broadcom shares have rebounded about 20% since my final replace on the corporate (solely a few month and a half in the past), and whereas that’s higher than the efficiency of the SOX index (up about 16%) and sure choose friends (like Marvell (MRVL)), a couple of like Microchip (MCHP) and NVIDIA (NVDA) have performed even higher. Pull the comparisons out a yr, although, and Broadcom is handily outperforming all of these besides Microchip (which it has outperformed, however not by a large margin).

I nonetheless view Broadcom as a core holding. I really like the corporate’s leverage to high-end networking/information middle demand for connectivity and AI acceleration, in addition to leverage to house broadband, and I consider companies like wi-fi, storage, and software program are nonetheless greater than worthwhile over the long term. Roughly 20% beneath my honest worth estimate and priced for a excessive single-digit long-term annualized return, this stays a sexy thought in my opinion.

A Beat Is A Beat

Broadcom did not blow away sell-side expectations for the fiscal fourth quarter, however given experiences and steerage from peer corporations, it was nonetheless a better-than-expected efficiency and the tempo of enterprise appears to be holding up higher than for many (one thing I’ve anticipated and previewed in prior items).

Revenue rose 21% yr over yr and 5.5% quarter over quarter, coming in simply forward of expectations. Semiconductor income rose 26% yoy and seven% qoq, beating by nearer to 1%, whereas Software income rose 4% yoy and fell barely from the prior quarter, lacking by about 1%.

Non-GAAP adjusted gross margin improved 10bp yoy however declined 120bp qoq and missed by 80bp. Operating revenue (additionally non-GAAP adjusted) rose nearly 26 yoy and 6% qoq, barely forward of expectations, with working margin up 240bp yoy and 20bp qoq to 61.6%, beating by 20bp.

Broadcom does not present detailed section breakdowns however does present sufficient data to make some extrapolations/estimates.

Within Semiconductors, Networking grew about 30% yoy and seven% qoq, with the corporate having fun with sturdy networking demand (Arista (ANET), Ciena (CIEN), and Cisco (CSCO) all posted wholesome progress), in addition to sturdy demand for its customized ASICs (up 33% for the total yr. Storage income rose round 50% yoy and eight% qoq, whereas Wireless rose 13% yoy and 26% qoq. Broadband grew 20% yoy and powerful PON, DOCSIS, and WiFi6 demand, whereas Industrial (a small enterprise at Broadcom) rose 19% yoy and declined 4% qoq on some weak point in China.

Markets And Customers Matter, And Broadcom Has The Right Exposures Now

One of the factors I’ve tried to hammer house in latest articles on Broadcom is that not solely does the corporate have some really superior merchandise (the Tomahawk, Jericho, and customized ASIC companies, for example), however additionally they have attractively differentiated publicity that ought to maintain the corporate outperforming its peer group (a minimum of by way of financials).

While general cloud capex spending has been rising at a mid-teens clip this yr, that drops into the excessive single-digits if you happen to exclude Meta (META), however Broadcom advantages right here from its leverage to Meta’s ongoing investments into AI (partly to energy Reels as a rival to TikTok). Likewise, whereas I’m extra adverse on general cloud spending subsequent yr, I see elevated spending on high-end connectivity and AI acceleration as hyperscalers and different main information middle operators make investments to remain on high of visitors progress – progress that I consider shall be helped by much more adoption of cloud-based Infrastructure-as-a-Service as corporations look to chop their capital depth and switch from mounted to variable prices.

Said in a different way, I count on sturdy spending on 400G+ connectivity and AI acceleration, and that feeds immediately into what Broadcom does finest. While I do see Marvell stepping up its sport, and I do see some modest danger from Cisco turning extra to in-house silicon, the general pattern continues to be very a lot in Broadcom’s favor. While administration is on the lookout for sequential weak point in fiscal Q1 (on “lumpy” tendencies), I consider the corporate will nonetheless see wholesome progress in CY’23.

In Wireless, the outlook for Apple (AAPL) volumes is not nice, however Broadcom continues to leverage sturdy design/efficiency capabilities to achieve share in filtering and connectivity. What’s extra, whereas Apple volumes could also be trying weaker, they’re higher than the digital Superfund web site that’s the Chinese Android telephone market proper now.

Broadband has been surprisingly sturdy, and I’m undecided if Broadcom is taking some share again from MaxLinear (MXL), or if that is only a byproduct of various mixes (merchandise and clients). In any case, each corporations are seeing sturdy WiFi demand, and administration at Broadcom is trying ahead to WiFi 7 deployments.

Broadcom’s steerage for “flattish to up” progress in enterprise storage was extra of a shock, given the weaker steerage from Marvell. Broadcom advantages from much less retail publicity and powerful MegaRAID adoption, however I nonetheless discover the outperformance attention-grabbing and suggestive of some share shifts. I’m not massively bullish on the near-term outlook for storage, and I feel the top market may very well be weak till later in CY’23.

Looking at steerage extra comprehensively, administration has a few yr of semiconductor income already within the books, and the corporate has been diligent about scrubbing out over-ordering and imposing its no-cancellation/no-rescheduling insurance policies. Lead occasions have shrunk these days (down 15 days in October to 27.8 weeks versus an business common of 6 days and 25.5 weeks, as per Christopher Rolland at Susquehanna), however to not a decree that issues me, significantly given the aforementioned drivers in networking.

Uncertainties With VMware Are Not A Critical Issue

Here of late, it seems to be as if the proposed acquisition of VMware (VMW) is getting extra scrutiny from regulators within the U.S. and Europe, with Britain’s CMA speaking about investigating a “substantial lessening of competition” and the U.S. FTC investigating the “conglomerate effects”.

I personally discover this all a bit foolish. While there shall be cross-selling synergies between VMware and Broadcom’s legacy software program companies, there’s actually no overlap, and proving any lessening of competitors shall be a stretch in my opinion. I truly do applaud this shift in the direction of genuinely making an attempt to implement antitrust legal guidelines, however I feel that is the unsuitable deal to make use of for example and I feel issues like “conglomerate effects” are simply foolish in comparison with offers I’ve seen permitted during the last yr within the industrial sector (to not point out different sectors).

The Outlook

I’ve modestly raised my FY’23 income expectations, but additionally modestly trimmed my ’25-’27 numbers, so the online impact is fairly small (my FY’31 income estimate is about 2% greater, and I’m nonetheless on the lookout for wholesome mid-single-digit income progress (round 5%).

I’ve modestly trimmed again my margin assumptions, however that’s extra out of warning or conservatism than any actual concern within the enterprise. I nonetheless consider that the corporate can maintain adjusted working margins within the low-60percents (with potential upside to the mid-60percents), and I’d word that upcoming contributors like Tomahawk 5 (with built-in photonics) may supply underappreciated margin uplift. Long time period, I count on adjusted free money move margins within the high-40percents, with FCF progress of round 6%.

Between discounted money move and margin/return-driven EV/income, I consider Broadcom shares stay round 20% undervalued within the close to time period, with long-term whole annualized return potential within the excessive single-digits. Were the market to bitter even additional on the chip sector, a return to prior trough valuation norms may create a draw back to the $470s, however that assumes that Broadcom would get a “sector-trough” a number of, which I discover unlikely.

The Bottom Line

Broadcom’s differentiated end-market leverage and powerful portfolio of performance-driven merchandise proceed to serve the corporate nicely, and I do not assume right now’s share worth displays that worth. Broadcom continues to be a comparatively widespread advice, and I may see the shares lagging different chip names which have been crushed down extra as sentiment recovers in 2023, however I nonetheless view this as a really strong core tech holding.

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