Buy into Broadcom's AI Growth as VMware Lifts Q2 Earnings?

Reporting results for its fiscal second quarter Thursday evening, Broadcom AVGO was able to surpass its Q2 expectations and offer favorable guidance thanks to its lucrative expansion as a provider of AI networking chips and custom AI accelerators, which are critical to data centers, smartphones, autonomous vehicles, robotics, and edge computing.

Helping to lift these innovative technologies, Broadcom’s acquisition of virtualization and cloud computing company VMware has also begun to pay off after acquiring the enterprise IT infrastructure player in 2023 for over $60 billion.

Broadcom’s AI Growth   

Driven by strong momentum from VMware and demand for its AI semiconductors, Broadcom’s Q2 sales spiked 20% year over year to a record $15 billion, topping estimates of $14.94 billion. Total Q2 semiconductor revenue increased 17% to $8.4 billion. AI semiconductor revenue contributed to more than half of the segment’s revenue at $4.4 billion, a 46% spike and a ninth consecutive quarter of  AI semi growth.

Fueling Broadcom’s AI semi growth, custom accelerators revenue grew by double digits, while AI networking revenue soared over +170%.

With the integration of VMware helping with its AI infrastructure capabilities, it’s noteworthy that Broadcom also has collaborations with Alphabet GOOGL, Meta Platforms META, Microsoft MSFT, and Amazon AMZN to develop custom AI accelerators that optimize performance and reduce costs.

Broadcom’s Impressive Operating Efficiency Continues

Notably, Broadcom has now exceeded the Zacks EPS consensus for 17 consecutive quarters and has at least reached earnings expectations in every quarter dating back to November of 2012. Broadcom’s Q2 EPS of $1.58 edged estimates of $1.57 and climbed 43% from $1.10 a share in the comparative quarter.

Also highlighting Broadcom’s impressive operating efficiency, Q2 consolidated adjusted EBITDA rose 35% to $10 billion, keeping it on track for another record year in this regard after posting an adjusted EBITDA peak of $31.9 billion in 2024.  

It’s also noteworthy that Broadcom’s Q2 gross profit of $11.9 billion reflected a 79.4% gross margin, with the chip giant achieving a record gross profit of $39.7 billion last year on a 76.9% gross margin.

Broadcom’s Elevated Revenue Guidance

Most reassuring to the notion that there could be more upside for Broadcom stock was its favorable guidance in a macroeconomic environment where many companies have cited uncertainty and have lowered their outlook.

In contrast, Broadcom raised its guidance for its fiscal third quarter, expecting Q3 sales to increase 21% to $15.8 billion from previous projections of $15.6 billion. This also came in above the current Zacks Consensus of $15.73 billion or 20% growth (Current Qtr below).

More intriguing, Broadcom now expects AI semiconductor revenue to soar 60% during Q3 to $5.1 billion from previous forecasts of $4.9 billion. Broadcom projects total semiconductor revenue to increase 25% this quarter to approximately $9.1 billion. Additionally, Broadcom expects VMware to propel its infrastructure software revenue by 16% to $6.7 billion.   

Conclusion & Strategic Thoughts

Thanks to the successful integration of VMware, Broadcom’s business operations appear to be firing on all cylinders, especially as it relates to AI growth. Expected to post double-digit top and bottom-line growth in fiscal 2025 and FY26, Broadcom stock currently sports a Zacks Rank #2 (Buy).

Furthermore, many strategists have eyed a potential post-earnings selloff as a buying opportunity with Broadcom stock down 5% on Friday on what appears to be profit taking, as AVGO is sitting on more than +200% gains over the last two years.  

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This article originally published on Zacks Investment Research (zacks.com).

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