Wall Street expects Broadcom to post 34% year-over-year growth in adjusted earnings per share for the fiscal third quarter.
(Bloomberg) — Investors worried about faltering momentum in the artificial intelligence trade are looking for a spark from Thursday’s earnings report by the world’s hottest chipmaker: Broadcom Inc.
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But after the more than 100% rally in Broadcom shares since they bottomed in April, adding about $730 billion to the company’s market value and making it the third-best performer in the Nasdaq 100 Index during that time, the issue is how much further the stock can run — even off blowout results. Broadcom shares rose as much as 2.1% intraday Thursday, a third consecutive day of gains.
“The bar is high because the stock has performed well, but their business is performing really well,” said Joseph Shaposhnik, portfolio manager of the Rainwater Equity ETF, which has Broadcom as its third-largest position. “The short-term weather seems to be amenable to a decent quarter. But it’s up a lot, so anything is possible.”
The risk of the results being a “sell the news” event for the market is real based on recent earnings reports from AI chipmakers. Nvidia Corp.’s stock is down nearly 6%, erasing roughly $270 billion in market value, after the company’s results on Aug. 27 included a lukewarm revenue forecast that was actually in line with Wall Street estimates. And shares of Marvell Technology Inc., a close Broadcom competitor, plunged 19% on Friday after its data center revenue missed estimates.
The Philadelphia Stock Exchange Semiconductor Index has fallen more than 3% since Nvidia’s report, compared with a less than 1% decline for the tech-heavy Nasdaq 100. Arm Holdings Plc is down more than 4% while Advanced Micro Devices Inc. is off about 3.5%.
With the bar set increasingly high, it won’t be a shock if Broadcom shares also slip, at least in the short term, following its results, which are due after the bell. That’s what the stock did after the company’s previous earnings report in June, which topped analysts’ estimates.
Wall Street expects Broadcom to post 34% year-over-year growth in adjusted earnings per share for the fiscal third quarter to $1.67, and a 21% jump in revenue to $15.8 billion. The expansion is being driven by billions of dollars in spending by hyperscalers including Alphabet Inc., Amazon.com Inc. and Microsoft Corp.
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“It may be hard for Broadcom to raise expectations on this call considering it said it would already grow its AI revenue by 60% next year,” Ben Reitzes at Melius Research wrote in a note to clients on Sept. 2 in which he raised his price target to $335 from $305. “However, the company seems to be firing on all cylinders and we’d use any weakness as a buying opportunity since there is such a shortage of this type of leadership outside Nvidia in AI.”
Analysts who cover Broadcom have long been bullish on the stock, but they’re seeing limited upside from here. The average price target is about $308 and the shares closed Wednesday at $302.39.
Broadcom is the biggest designer of what the industry calls ASICs, or application-specific integrated circuits. The company helps owners of large data centers, such as Alphabet’s Google, to create their own chips. That business unit, one of several inside its semiconductor division, has helped Broadcom become one of Wall Street’s favorite picks as a beneficiary of the AI boom.
Investors are likely to focus on the company’s AI growth trajectory and will be looking for an update on four in-development engagements for its XPU ASIC chips, Bloomberg Intelligence analyst Kunjan Sobhani wrote in a note on Wednesday.
Other key areas to watch include growth in VMware as well as the pace of recovery in the non-AI semiconductor business, which could help the chipmaker regain some lost ground in gross margins.
“With its non-AI semi business (27% of F25E sales) down roughly 40% from the peak, we believe that business should recover and offset some gross margin dilution from the AI business,” Citigroup analyst Christopher Danely wrote in an Aug. 26 note reiterating a buy rating on the stock.
Of course, Broadcom shares could avoid the same fate as Nvidia and Marvell. The company doesn’t have the same degree of exposure to China as Nvidia, and it has shown an ability to capture spending by big technology companies building out their own AI infrastructure.
“Marvell obviously falling short of that data center revenue, it kind of lets you know that it is still a competitive marketplace and we are starting to see winners and losers,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. “The pivot is going to be more toward those companies that are actually winning that return on invested capital” like Broadcom.
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–With assistance from Ian King, Catherine Ngai, April Ma, Subrat Patnaik and David Watkins.
