Broadcom Earnings: Higher AI Forecast and Rapid VMware Integration Are Encouraging

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $970.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Earnings

We’ve raised our fair value estimate for Broadcom AVGO stock to $970 per share from $840. The company reported a good fiscal fourth quarter, but our valuation is driven primarily by higher long-term forecasts for artificial intelligence-driven chip sales and more bullish assumptions for the integration of VMware. In our view, Broadcom’s sales growth stemming from AI will more than offset softer demand across its other semiconductor markets in fiscal 2024.

We’re confident in management’s aggressive goals for integrating VMware, which implies getting close to Broadcom’s pre-acquisition margin profile exiting fiscal 2024. This would be the latest and greatest example of the firm’s impressive acquisition program, which contributes to our wide moat and exemplary capital allocation ratings. With our new valuation, we see the stock as modestly undervalued.

The quarter’s results were solid and closely in line with our expectations. Sales of $9.3 billion rose 4% year over year and 5% sequentially, with growth in both semiconductors and software. Broadcom’s networking chips continue to see impressive demand, largely driven by AI, and it saw typical seasonal strength for its wireless chips that sell into Apple’s products like the iPhone. Broadcom’s other chip markets of broadband and storage are softening, and we expect this to continue through fiscal 2024. Non-GAAP gross and operating margins of 74% and 62%, respectively, were within typical ranges for the firm and remain extremely impressive.

This was Broadcom’s final quarter excluding VMware, which was officially brought into the fold in late November. Management reiterated its focus on strategic customers and its plan for a rapid subscription transition away from perpetual licenses. Unsurprisingly, the firm plans to divest non-core VMware businesses like Carbon Black and end-user computing.