Broadcom’s Rosy Q4 Outlook Bucks Recent Cautious Commentary From Peers; Stock Undervalued

Broadcom (AVGO) reported strong fiscal third-quarter results slightly ahead of our expectations, buoyed by healthy networking demand led by cloud and enterprise data center spending. Despite slowing consumer demand, Broadcom’s networking, storage, and broadband business units have proved resilient, and the firm’s execution on its software acquisitions such as Symantec and CA Technologies is also admirable. We think Broadcom’s wireless segment should also benefit from Apple’s upcoming iPhone launch in the fiscal fourth quarter.

We are maintaining our fair value estimate for narrow-moat Broadcom at $624 per share, reflecting a 75% probability the firm’s pending VMware acquisition closes sometime in fiscal 2023. Should the deal close, our fair value estimate for the combined entity would be $645 per share, which reflects cost synergies we think Broadcom can extract as well as the fact that we think the firm is acquiring VMware at an attractive valuation. Our stand-alone fair value estimate for Broadcom remains $562 per share.

Fiscal third-quarter sales were $8.5 billion, up 25% year over year. Semiconductor solutions revenue was $6.6 billion, which was up 32% year over year. Demand for networking products continued to be robust, growing 30% 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 70% year over year thanks to solid enterprise IT spending. Wireless revenue was up 14% year over year as Broadcom benefited from Apple’s iPhone 13 and associated increase in 5G radio frequency content. Infrastructure software revenue came in at $1.84 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.