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Since forecasting light revenue guidance for the current quarter on Sept. 5, chip giant Broadcom (AVGO) stock is down about 5%, despite reporting a solid beat on its fiscal Q3 earnings. Given the broader weakness in artificial intelligence (AI) stocks recently, including industry leader Nvidia (NVDA), is Broadcom's decline a symptom of more serious fundamental troubles - or simply a prime buy-the-dip opportunity as overheated AI stocks cool off?
The analyst community overwhelmingly thinks it's the latter, with Wall Street coming out en masse to defend AVGO stock after earnings. Here's a closer look at why Broadcom's post-earnings pullback is an opportunity for long-term investors to load up on the company's stock now.
About Broadcom Stock
Founded in 1991 and based out of San Jose, Broadcom (AVGO) is one of the leading semiconductor companies in the world. They design, develop, and supply a wide range of analog and digital integrated circuits (ICs) and other related products, creating the tiny chips that power many of our electronic devices. Broadcom also develops software for data center networking. The company currently commands a massive market cap of $655.5 billion.
Broadcom stock may have pulled back about 24% from its June highs, but the stock is still up almost 29% on a YTD basis - outperforming the broader S&P 500 Index ($SPX), which is up 14.3% on the year so far.
AVGO stock also offers a dividend yield of 1.51%, based on its quarterly payout of $0.53 per share. The company has been raising dividends consistently for the past 13 years, backed by a payout ratio of 46.36% - which allows Broadcom to keep rewarding shareholders while still reserving most of its earnings for future growth initiatives.
Behind Broadcom's Fiscal Q3 Results
While investors focused on the narrow revenue guidance miss for the current quarter, Broadcom's results for its fiscal Q3 were impressive, as the company again reported a beat on both revenue and earnings.
Revenues for the quarter came in at $13.1 billion, up 47% from the previous year, led by strength from its AI operations. Both the key segments of Semiconductor Solutions ($7.3 billion, +56% YoY) and Infrastructure Software ($5.8 billion, +44% YoY) reported healthy growth. Adjusted EPS increased by 17.7% in the same period to $1.24, outpacing the consensus estimate of $1.22.
Over the past 10 years, Broadcom's revenues and EPS have grown at CAGRs of 29.92% and 31.91%, respectively.
Also during Q3, Broadcom reported net cash from operating activities of about $4.96 billion, compared to $4.6 billion in the year-ago period. Free cash flow increased, as well, coming in at $4.79 billion, or 37% of revenue.
For the ongoing fourth quarter, AVGO anticipates revenue of $14 billion, just short of the consensus forecast of $14.14 billion. The light forecast came even as management projected $12 billion in AI-related revenue for the full year, up from its prior guidance of $11 billion.
What's Driving Growth at Broadcom?
Broadcom's optimism in AI is rooted in its leadership and expertise in developing Application-specific Integrated Circuits (ASICs), traditional computing, and AI acceleration chips. In networking, the company has also doubled its year-over-year switch sales, driven by PAM-5 and Jericho 3 technologies.
This momentum is expected to sustain Broadcom's strong gross margins in the coming quarters. In the third quarter, gross margins rose by 36% from the previous year, reaching $8.4 billion with a margin of 64%, up from 62% in the prior quarter. The steady increase in gross margin reflects the company's competitive edge in the market.
Beyond AI, Broadcom is making significant strides in the fast-growing edge computing space. In late August 2024, the company introduced three new tools following its VMware acquisition, including advanced network appliances combining fixed wireless access and satellite connections, a new cybersecurity solution, and enhancements to its edge computing stack.
Broadcom is also a leader in enterprise AI, with its dominance in connectivity and AI infrastructure enabling seamless integration across various organizational components. Its cutting-edge networking and infrastructure equipment play a critical role in supporting AI and other key business functions.
Management has also indicated that non-AI markets have likely reached their bottom, with a gradual recovery expected in the coming quarters.
Analysts Defend AVGO Stock After Earnings
Despite AVGO's miss on guidance, bulls continue to back Broadcom on Wall Street. Jefferies, Citi, and Mizuho all reiterated their optimistic ratings after the report, while Bank of America's Vivek Arya backed a “Buy” rating with a slightly higher price target of $215. Morgan Stanley also raised its price target for the stock from $176 to $180, while maintaining an “Overweight” rating.
Overall, analysts have deemed the stock a “Strong Buy,” with a mean target price of $190.51. This denotes an expected upside potential of about 30% from current levels.
Out of 32 analysts covering Broadcom stock, 29 have a “Strong Buy” rating and 3 have a “Hold” rating.
