Semiconductor manufacturer and infrastructure software giant Broadcom (AVGO) greatly impressed AVGO stock investors on March 3 after reporting better-than-expected first-quarter earnings for Fiscal Year 2022.
I remain bullish on Broadcom stock’s future prospects. Building on the momentum exhibited in December as expected, the company reported strong revenue growth, record operating margins, and a surge in net income.
Strong revenue growth and expanding operating margins were the big highlights in AVGO’s latest earnings installment to support a bullish position on the tech stock even during tumultuous times for a war-spooked equities market.
Broadcom’s Biggest Revenue Segment Delivered
Broadcom’s first-quarter 2022 revenue of $7.7 billion represented a 16% year-over-year increase. It exceeded management’s prior guidance for the quarter by a wide margin.
Revenue growth was mainly propelled by the company’s Semiconductor Solutions segment’s sales, which surged by 20% year-over-year to constitute 76% of total revenue for the quarter.
AVGO’s biggest revenue segment is all fired up indeed.
The company’s smaller segment, Infrastructure Software, delivered sales of $1.8 billion, a respectable 5% year-over-year gain.
Most noteworthy, the company exceeded its earlier revenue guidance for $7.6 billion.
The latest financial results marked Broadcom’s third consecutive quarter of revenue growth.
Record Quarterly Operating Margins
Broadcom’s operating earnings have grown steadily with revenue growth over the past seven quarters.
The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) margin was a record 62.5% for the first quarter, up from the previous year’s comparable margin of 59.2%, and 55.1% two years ago.
EBITDA margins show potential earning power irrespective of how it is taxed, financed, or organized. Broadcom’s operations have become more profitable by this measure lately.
Growing operating margins mean the business is getting more profitable as it grows. Demand growth is exceeding expense increases.
Operating leverage is evidently working in the company’s favor. Under normal circumstances, AVGO stock price should increase in response.
Gross margins were 76% of revenue for the quarter, up 227 basis points year-over-year.
AVGO Stock Hits 48.5% Net Margins
Broadcom’s net profit margin expanded to a record 48.5% during the first quarter.
The company converted nearly half of its revenue into net profits. Net margin expanded from 44.7% reported for the same quarter last year, much to the delight of AVGO stock investors
Most noteworthy, Wall Street analysts had predicted a net earnings margin of a record 47.7%. Record results eclipsed Wall Street’s record forecast.
Broadcom’s net earnings per share (EPS) surged by 26% year-over-year. Its diluted earnings per share (EPS) of $8.39 beat Wall Street’s consensus EPS forecast for $8.13.
Post Thursday’s financial results, the company has beaten analysts’ EPS forecasts for a seventh consecutive quarter.
Broadcom Q2 2022 Business Outlook
Management provided revenue guidance of $7.9 billion for the second quarter of Fiscal Year 2022. The latest guidance represents 20% year-over-year sales growth.
Adjusted EBITDA margin guidance for the second quarter of 62.5% carries forward the latest record operating margin.
The company did not provide annual guidance. Understandably, that was a prudent thing to do given increasing uncertainties triggered by the ongoing war in Eastern Europe.
Analysts expect 11.8% growth in revenue to $30.7 billion for Fiscal Year 2022.
Wall Street’s Take on AVGO Stock
Broadcom stock has a Strong Buy consensus rating from Wall Street analysts, based on 18 Buys and three Holds.
The average AVGO stock price target of $698.20 represents a 16.8% potential upside over the next 12 months.
Investor Takeaway
Broadcom’s Q1 results provided all the best reasons for optimism regarding AVGO stock in 2022. Shares could still rise above all-time highs over the next 12 months, or as soon as geopolitical risks subside.
AVGO stock has a “Perfect 10” on TipRanks’ Smart Score rating system, indicating its high probability to outperform the broader stock market this year.
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