Semiconductor manufacturer and infrastructure software giant Broadcom (AVGO) is scheduled to report its fourth-quarter earnings results for the Fiscal Year 2021 on Thursday. Broadcom stock investors wait eagerly to witness if the company will continue to justify its Strong Buy rating by top Wall Street analysts.
In September, the company reported a strong 16% year-over-year increase in third-quarter net earnings. Fourth-quarter numbers could even be better.
I am bullish on AVGO stock. (See: Analysts’ Top Stocks)
What to Expect in Broadcom’s Fourth-Quarter Earnings Results
Broadcom will release its earnings for the three months ended October 31, 2021, on December 9, 2021, after the market close.
Earlier in September, the company provided fourth-quarter revenue guidance for $7.35 billion. The number represents a potential year-on-year growth rate of 13.7%.
Broadcom also raised its fourth-quarter adjusted EBITDA guidance to about $4.48 billion, or 61% of projected revenue. The figure indicates a 17% year-over-year growth rate from $3.83 billion printed during a comparable quarter last year.
Meanwhile, Wall Street analysts predict net earnings of $7.74 per diluted share, indicating a 22% jump in profitability from last year’s comparable $6.35 per share profit.
Profitability is rising for Broadcom, and the company has beaten analyst earnings estimates in all five recent earnings releases. See Broadcom’s Earnings & Revenues
What’s Driving Broadcom’s Strong Revenue Growth?
True to its name, Broadcom offers a ‘broad’ range of ‘communications’-related products with revenue reported in two major segments, Semiconductors and Infrastructure Software Solutions.
With over 13 different offerings, Broadcom’s Semiconductor segment remains the major revenue contributor (contributing about 74% of the company’s $6.8 billion in sales during the most recent quarter).
During a third-quarter earnings update three months ago, Broadcom’s President and Chief Executive Officer, Hock Tan, highlighted that AVGO’s networking revenue could accelerate in the fourth quarter due to a different set of demand dynamics. This is despite this segment’s revenue rising by 19% in the third quarter.
“We see cloud customers upgrading to our next-generation 800-gigabit base Tomahawk 4 and Trident switches”, said Hock Tan. The company expects networking revenue to grow in the “low double digits year-on-year.”
The CEO was also upbeat that double-digit year-on-year revenue growth rates could be realized in almost all of AVGO’s other segments under the semiconductor portfolio. These include Broadband, Wireless, and Industrial.
Management only expects Infrastructure Software revenue to grow by around mid-single-digit percentage year-over-year during the fourth quarter.
Most noteworthy, Broadcom isn’t immune to a global semiconductor crisis. The company is carefully scrutinizing demand while vigilantly trying to avoid piling up on inventory.
Analysts Are Bullish on AVGO Stock Outlook
In March last year, Broadcom collaborated with Taiwan Semiconductor Manufacturing Company (TSM) on new generation CoWoS technology.
In an earnings call in September, Five-Star-rated Wall Street analyst Harsh Kumar from Piper Sandler asked if AVGO was considering potential price increases since TSMC has indicated taking that route. Broadcom’s CEO couldn’t comment on that highlighting that as a company they “try not to talk about customers.”
Harsh Kumar reiterated his Buy rating on AVGO stock three months ago but he maintains a $550 per share price target on Broadcom stock which indicates a potential 6.6% downside from its current valuation.
However, analyst Harlan Sur of J.P. Morgan, with a good 69% success rate on his calls, is more bullish on Broadcom stock with a $655 price target assigned on Monday indicating 11.2% upside. (See Harlan Sur’s track record on TipRanks)
In response to Harlan Sur’s probing question during the most recent earnings call, company Chief Financial Officer, Kirsten Spears, responded by confirming that Broadcom will continue to return 50% of its free cash flows to its shareholders – meaning dividend raises are around the corner.
AVGO’s $3.60 quarterly dividend per share yields a respectable and reliable 2.6% annually, with a three-year CAGR of over 47%.
Wall Street’s Take
AVGO stock earns a Strong Buy rating from Wall Street. This is based on 11 Buys assigned in the past three months.
The average Broadcom price target of $632.00 implies 7.4% potential upside over the next twelve months.
Disclosure: At the time of publication, Brian Paradza did not have a position in any of the securities mentioned in this article.
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