Broadcom's Positive Momentum Likely To Continue In 2022

Broadcom AVGO reported strong fiscal first-quarter results ahead of our expectations. The firm’s results were buoyed by healthy networking demand led by cloud and enterprise data center spending. Broadcom’s product portfolio is well tailored to address the work-from-home environment and we expect continued double-digit year-over-year revenue growth next quarter, especially as enterprises maintain infrastructure technology spending consistent with the COVID-19 recovery. We remain positive on Broadcom’s networking, storage, and broadband business units, and we applaud the firm’s integration efforts of its software acquisitions such as Symantec and CA Technologies. Management is optimistic that recent tailwinds will continue over the course of 2022, with robust bookings and lean inventories. Consequently, we are raising our fair value estimate to $545 per share from $500 as we incorporate stronger top-line growth as well as operating leverage. We recommend prospective investors wait for a wider margin of safety before investing in narrow-moat Broadcom.

First-quarter sales were $7.7 billion, up 16% year over year. Semiconductor solutions revenue was $5.9 billion, which was up 20% year over year. Demand for networking products continued to be solid, growing 33% year over year thanks to next-generation Tomahawk and Trident switch products at cloud customers and Jericho at telecom customers. Server storage connectivity sales grew 32% year over year thanks to the continued recovery in enterprise IT spending. Wireless revenue was up 5% year over year as Broadcom benefited from Apple’s iPhone 13 and associated increase in 5G RF content. Infrastructure software revenue came in at $1.8 billion, which was up 5% year over year. While we aren’t expecting material growth from this segment, we note it is a strong cash-flow generating and margin accretive business, with over 90% of bookings representing recurring subscription and maintenance during the quarter.

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