The semiconductor giant Broadcom (AVGO) is set to report its Q4 earnings on December 12th, after the closing bell. My bullish outlook on the stock is driven by the company’s expertise in custom AI chips, which is anticipated to drive its next growth phase as AI companies and hyperscalers adjust their CapEX strategies to expand infrastructure and technology. While the stock is still up significantly this year, there have been some bumps in the road, with skepticism around the company’s Q4 revenue guidance and potential guidance for Fiscal 2025.
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That said, given Broadcom’s impressive track record of beating top-and-bottom-line estimates each quarter, I believe much of the post-Q4 reaction will depend on the guidance provided. In this article, I’ll dive into Broadcom’s recent performance, review how last quarter went, and outline what investors can expect for Q4.
Broadcom’s Strong Performance and Rising Valuation
Before delving into my bullish outlook on Broadcom, it’s important to provide some context regarding the company’s recent performance. Broadcom has seen gains of over 190% since the start of 2023, largely driven by the strong performance in the semiconductor industry. As a key provider of chips and components used by hyperscalers, Broadcom has benefited significantly from the rapid growth of AI applications in 2023, fueled by innovations like large language models (LLMs) and generative AI.
Over the past three years, Broadcom has achieved a revenue CAGR of 21%, and in the last twelve months, this growth has accelerated to over 32% year-over-year. Moreover, analysts forecast a 44% revenue increase for Fiscal 2024. While the company’s bottom line has seen a negative net income CAGR of 5.6% over the past three years, it is expected to grow its EPS by 14.8% in 2024.
These bullish growth trends, fueled by high demand for its chips, have translated into a rapid rise in Broadcom’s valuation. The company’s non-GAAP P/E ratio has surged from an average of 19.5x over the last five years to 37.5x. As a result, with valuations at all-time highs, the bar for Broadcom stock has been raised, making it more vulnerable to volatility and leaving less room for error amid any potential setbacks.
Recapping Broadcom’s Q3 Performance
Continuing the bullish thesis, Broadcom exceeded top-and-bottom-line expectations in its most recent quarter. The company reported earnings of $1.24 per share, a $0.02 beat, and $13.07 billion in revenue, surpassing estimates by $108.3 million.
Revenue grew by 47% year-over-year, though organic growth was much lower at only 4%, excluding the impact of VMware’s acquisition—completed at the end of 2023. Despite the strong top-line performance, Broadcom reported a GAAP net loss of $1.9 billion, primarily due to a one-time non-cash tax provision of $4.5 billion related to an intra-group transfer of intellectual property. This accounting maneuver was likely intended to reduce future tax liabilities.
On the cash flow front, Broadcom generated $4.96 billion in cash flow from operations, with $4 billion in free cash flow, representing 37% of revenue. The company continues to benefit from strong demand for AI and data center solutions, projecting $12 billion in AI-related revenue for Fiscal year 2024.
What to Expect from Broadcom’s Q4
One key reason I have a Buy rating on Broadcom ahead of its earnings report is the company’s track record of consistently beating earnings expectations. Broadcom has not missed a single top or bottom line estimate since Fiscal Q1 2020. While past performance does not always indicate future results, it seems unlikely that this trend will change in Q4.
Broadcom has guided for $14 billion in revenue for Q4, signaling continued growth, and expects an adjusted EBITDA margin of 64%, which would be a 1% increase from the previous quarter. This optimistic outlook, combined with the ongoing integration of VMware and strong demand for AI solutions, aligns with everything investors want to hear from a company they’re looking to invest in.
However, it’s worth noting that the expectations for Fiscal Q4 have slightly adjusted downwards, with EPS and revenue estimates lowered by 0.1% over the past month.
The Impact of Guidance on Broadcom’s Q4 Success and Future AI Growth
A big part of my bullish take on Broadcom comes from the expectation that they’ll beat both top-and-bottom-line estimates. But honestly, the real action post-earnings will likely hinge on the management guidance for Fiscal 2025. While the firm has provided limited visibility, it has indicated that the trend of strong AI revenue growth is expected to be sustained, at least in the near term.
However, one key point stood out during the management’s last earnings call. When CEO Hock Tan was asked how Broadcom’s AI-related revenue growth would compare to GPU (graphics processing unit) growth, he explained that Broadcom’s AI growth is tied to large hyperscalers moving toward custom AI chips.
This shift is expected to take time, while GPU growth is more immediate and driven by companies like Nvidia (NVDA). In my view, the growth of GPUs in 2025 may not necessarily translate into similar growth for Broadcom in the AI sector. This divergence could lead to less optimistic guidance for Fiscal 2025, especially given the high expectations surrounding Broadcom’s role in AI.
Is AVGO A Good Buy, According to Wall Street Analysts?
At TipRanks, the consensus on Broadcom stock is overwhelmingly bullish. Ten of eleven analysts rated AVGO as a Buy, resulting in a Strong Buy consensus. The average price target is $198.75, suggesting a 10.71% upside potential.
Conclusion
I have a Buy rating on Broadcom stock as its earnings approach, primarily due to its strong track record of beating earnings expectations. While reactions to the earnings report will likely depend on guidance for Fiscal 2025, management has indicated that investors should expect continued AI growth.
Regardless of the near-term market reaction, I believe Broadcom is well-positioned for continued growth. The stock remains below its recent peak from early November, and with AI-driven demand still fueling its expansion, as hyperscalers plan to increase investments in 2025, I expect the stock to rise steadily over the mid-to-long term, driving strong bottom-line growth.
