Broadcom’s earnings are unlikely to trigger a share price run

Broadcom [AVGO] is expected to report a 22.1% increase in year-over-year earnings and a 13.7% hike in revenues when it reports its fourth quarter figures on 9 December. The company follows a financial year from 1 November to 31 October.

Analysts at Zacks forecast that the semiconductor maker and software giant will report earnings of $7.75 per share and revenues of $7.35bn, boosted by demand for innovative chip-powered technologies such as 5G and artificial intelligence.

Yet, “customer concentration, intensifying competition and integration risks due to frequent acquisitions, continue to stress Broadcom’s margins,” warns Zacks.

Broadcom’s software infrastructure offerings around data storage, enterprise services and security have also been crucial as businesses increasingly undergo digital transformation.

“customer concentration, intensifying competition and integration risks due to frequent acquisitions, continue to stress Broadcom’s margins” - Zacks

One example came last month, when Meta [FB] (previously Facebook) announced it was now deploying the world’s highest bandwidth Ethernet switch chip, a Broadcom model known as the StrataXGS Tomahawk 4 switch series, in its data centre network fabric.

Broadcom has also benefited from the semiconductor shortage, as customers scramble around to get the chips they need to power digital transformations.

In its third quarter, Broadcom reported a 16% climb in revenues to $6.78bn and non-GAAP EPS of $6.96. Its semiconductor solutions segment remained dominant, with 19% revenue growth to $5bn, while its infrastructure software segment was up 10% to $1.7bn.

“Broadcom delivered record revenues in the third quarter reflecting our product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband, and wireless," said Hock Tan, President and CEO of Broadcom.

Broadcom’s share price rises

This demand has also helped its share price, which over the last 12 months has climbed 38.7%. For comparison, Broadcom’s peers, Cisco [CSCO] and Nvidia [NVDA], are up 28% and 128%, respectively.

Analysts, however, believe that there is not much further Broadcom can go. According to MarketScreener, analysts have a consensus ‘buy’ rating on the Broadcom stock and an average target price of $574.04. This is just 2.9% up on its $558.12 price at the close on 3 December.

Zacks analysts believe Broadcom is benefiting from its expanding product portfolio, multiple target markets, and acquisitions such as its purchase of enterprise software and services group CA and Symantec’s enterprise security business. It said Broadcom was seeing higher demand for wireless solutions as well as momentum in networking and broadband solutions.

There are challenges ahead, including the Federal Trade Commission approving a final order last month settling charges against Broadcom. The regulator concluded that Broadcom had “illegally monopolised markets for semiconductor components used to deliver television and broadband internet services through exclusive dealing”.

Broadcom is now prohibited from entering into certain types of exclusivity or loyalty agreements with its customers for the supply of key chips for traditional broadcast set top boxes and DSL and fiber broadband internet devices.

What analysts think of Broadcom

Despite this setback, Oppenheimer remains bullish. It raised its price target to $650 from $575 with analyst Rick Schafer, as reported by The Fly, reiterating an outperform rating. He said although “supply constraints” on semiconductors were likely to “again curb upside”, Broadcom’s 2022 is off to a strong start with a backlog of orders already above $20bn.

Argus has a $620 price target on the stock and a buy rating. Analyst Jim Kelleher said Broadcom’s customers were using its software for “modernising, optimising and protecting the world’s most complex hybrid IT environments”. Kelleher also noted, according to The Fly, that Broadcom’s software business had gone from a “tiny base" of customer to now serving most Fortune 500 companies.

He added that the stock is trading at a discount to its peers and is also “attractive on discounted free cash flow valuation”.

Broadcom’s future growth

Broadcom looks set to benefit from continued demand for semiconductors, as well as revenue growth in the buoyant enterprise software market.

“The themes for chips are strong. 5G, artificial intelligence, the metaverse. There’s so much end-market demand and capital flowing to where these guys sit” - Tocqueville Asset Management portfolio manager John Petrides

Demand for both of its business segments, especially from SMEs, will be in focus when it reports Q4 results. Another key focus may be on potential acquisitions and thoughts on the duration of semiconductor shortages.

But as John Petrides, portfolio manager at Tocqueville Asset Management, told CNBC, semiconductor stocks are in pole position, adding that interest rates could put pressure on tech stocks broadly, but semi-conductors should be able to weather much of the pain. “The themes for chips are strong. 5G, artificial intelligence, the metaverse. There’s so much end-market demand and capital flowing to where these guys sit,” Petrides said.