With Shares Near Highs, Here's to Watch in Broadcom's Q3 Report

Broadcom (NASDAQ: AVGO) has been one of the most talked-about names in the stock market as artificial intelligence (AI) has taken the world by storm. Many consider ChatGPT's November 2022 public launch as the point where AI was thrust into the cultural zeitgeist. Underscoring Broadcom’s importance to AI is the massive gains the stock has seen since then.

From November 30, 2022, through late August 2023, shares generated a total return of about 489%.

With a market capitalization of around $1.45 trillion, Broadcom's earnings reports are some of the most highly anticipated in the market. The semiconductor stock is set to release its Q3 results on Sept. 4, so we’ll dive into the key details that markets will be watching.

Broadcom Likely Needs Substantial Beats to See a Post-Earnings Surge

As with any stock, hitting its marks on revenue, adjusted earnings per share, and guidance will be key to Broadcom justifying its valuation. In Q2, Broadcom set its revenue guidance for Q3 at $15.8 billion, or a growth rate of 21%.

Wall Street estimates align with that figure, with MarketBeat expecting revenue of $15.82 billion. Adjusted EPS estimates come in at $1.66, which would represent a growth rate of 35%.

Still, posting small beats on these figures will unlikely push shares higher. NVIDIA (NASDAQ: NVDA) beat estimates on both sales and adjusted EPS on Aug. 27, and shares still fell slightly the next day.

Broadcom also beat slightly on both metrics in Q2, and shares dropped 5%.

Broadcom will likely need to beat significantly to see a post-earnings spike. This is because the stock has gained extensively over the past few months. Since Broadcom’s Q2 earnings release on June 5, shares are up nearly 26%.

Assuming its price of around $310 holds until Sept. 4, the stock will never have traded higher going into earnings. Broadcom’s forward price-to-earnings (P/E) ratio confirms its lofty valuation. The figure sits at over 42x, just below its all-time high mark of 43x.

Despite NVIDIA’s strong performance, the stock’s forward P/E was at a much less elevated 34x going into its latest earnings release on Aug. 27. That figure was nearly in line with its average forward P/E of 33x over the last three months.

Overall, these metrics suggest an elevated level of downside risk for Broadcom going into the Q3 report. Still, it is certainly conceivable that the company could post a significant beat and see shares gain. Providing guidance that puts revenue growth near the 25% range in Q4 would also likely go a long way.

Key Underlying Details that Could Influence Broadcom Stock

The most crucial aspect of Broadcom’s growth trajectory is its AI semiconductor revenues. The company expects to grow this business by 60% in Q3. Markets will surely want to see Broadcom hit or exceed this projection. The firm has also considered this growth rate sustainable into 2026. Providing commentary that reaffirms this will be key.

Possibly the most significant surprise catalyst that could launch Broadcom shares is commentary surrounding its four prospective AI chip customers. Any clear indication that Broadcom feels more confident that these prospects will turn into customers in 2026 or 2027. 

This could expand the company’s serviceable addressable market (SAM) estimates.

However, the company has said it likely will not update its SAM until 2026, indicating that updates on prospective customers in Q3 are unlikely. Still, Broadcom left the door open to providing updates sooner, creating potential for an early reveal that could move the stock.

Markets will also want Broadcom to hit or exceed its 16% growth target in its second most important business, infrastructure software. Last quarter, Broadcom said 87% of its 10,000 largest VMware customers had adopted VMware Cloud Foundation (VCF). Seeing that number continue to rise will also be key.

Recent Price Targets Provide Counterweight to Q3 Downside Risk

Since the beginning of July, MarketBeat has tracked eight updated Wall Street price targets on Broadcom, with an average target of $326—suggesting modest upside potential from recent levels.

These latest targets contrast with the MarketBeat consensus price target of around $302, which implies 2% downside.

Broadcom’s valuation suggests the stock faces higher downside risk going into its Q3 earnings release. However, the recent surge in high price targets supports a bullish counterargument.

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The article "With Shares Near Highs, Here's to Watch in Broadcom's Q3 Report" first appeared on MarketBeat.