Broadcom Corp. (NYSE: AVGO) shares showed mixed price action ahead of the Q2 report — expected from a market in transition. The results and guidance from NVIDIA Co. (NASDAQ: NVDA) supercharged the appetite for AI-related stocks and sparked a rally in several, Broadcom stock included.
The post-release action in Broadcom and the release itself echo results from names like Crowdstrike Holdings Inc. (NASDAQ: CRWD) and Salesforce.com Inc. (NASDAQ: CRM), which also issued better-than-expected results, increased their guidance and have the support of analysts.
The takeaway is that Broadcom's price action corrected from the NVIDIA-induced highs, and the analysts stepped up to support the market, indicating that the rally in Broadcom is not over.
Broadcom's Q2 results sparked five analyst updates, and more are coming. The five raised their price targets to $840 to $910, which compares favorably with the consensus estimates. The consensus estimate of $757 assumes the stock is fairly valued after the correction but is trending sharply higher and lagging behind the market. A move to the $840 to $910 range would put the stock back at fresh highs and could attain those levels by the end of the year. Based on the results and guidance, Broadcom may increase its guidance again.
The Shift to AI Drives Outperformance at Broadcom
Broadcom had a solid quarter verging on robust, with revenue of $8.73 billion, rising 7.8% over last year. The revenue beat the consensus by a slim margin and was driven by a 9% increase in semiconductor solutions.
Infrastructure software grew at a slower 3% pace but also contributed to the top and bottom line results. The best news is the margin and cash flow. The company's gross and operating margins widened, and FCF was robust. The company reports adjusted EBITDA of $5.6 billion and FCF of $4.4 billion, more than 50% of revenue. The adjusted EPS came in at $10.32, up 23% YOY and 18 cents or 175 bps ahead of the Marketbeat.com consensus.
"Our third quarter outlook projects year-over-year growth, reflecting continued leadership in networking as we support a measured ramp into large-scale AI networks," said Hock Tan, president and CEO of Broadcom Inc.
The guidance is also impressive, and why the analysts have upped their targets. The company expects FQ3 revenue to grow sequentially to $8.85 billion versus the consensus of $8.71. This is up 4.6% compared to last year, on top of last year's 25% growth, and strength should linger through the end of the year.
Capital Returns Help Sustain AVGO Share Prices
The company issued a dividend declaration with the earnings release good for $4.60, or 2.3% annualized. The payout is a safe and manageable 44% of earnings and has been growing. The next increase is due in Q1 of F2024. Share repurchases compound the payout — the company repurchased $3.4 billion in shares in Q2 and is on track to buy back 5% more than last year. The only red flag is that the cash balance is down from last year, but the company still has $11.5 billion on the books, and debt is down.
Shares of AVGO are down in premarket trading and may move lower during the session. However, the move shouldn't get far, and the day's candle will likely be green. In that scenario, this stock should enter consolidation ahead of another uptrend. If not, this stock could move down to $750 or lower before the uptrend resumes.