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Broadcom Is Dropping After Earnings

Today, I’m diving into Broadcom’s latest Q3 earnings report and sharing why I think the stock’s explosive growth may be overhyped. Broadcom has been an undervalued dividend growth machine for years, but after the AI boom in 2023, the stock skyrocketed almost 200%. I believe much of this rise isn’t fully supported by the fundamentals. Let me explain why I sold my Broadcom position after the Q2 earnings report and why I still see red flags in their recent results.

Let’s Break It Down!

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The Key Story

Broadcom Is Selling Off After Earnings - AVGO Stock Analysis 2024

AVGO Stock Summary & Q3 Results

Despite beating expectations in both earnings per share and revenue for Q3, Broadcom’s stock dropped over 6.5% after hours. This has pushed the stock down more than 22% from its recent all-time high. Before the earnings release, the stock was trading at $152 per share with a 65.5 P/E ratio based on GAAP EPS, and a 35 P/E ratio based on non-GAAP earnings. The annual dividend per share stands at $2.10, giving it a yield of 1.37%. This put the market cap at $711 billion.

Despite The Surge In Broadcom’s Stock Price over the past few years, earnings have not yet kept up with this growth. All the talk about AI has only made a small impact thus far on Broadcom’s overall business. The overwhelming majority of the top line revenue growth, comes from the recent acquisition of VMware, not AI-drive semiconductor sales.

Breaking Down Broadcom’s Business

Broadcom is divided into two main segments: Semiconductor Solutions and Infrastructure Software, with the former making up 60% of their revenue and the latter around 40%. Here’s why that’s crucial—only some parts of their semiconductor business are benefiting from AI. Most of their AI-related growth comes from the networking business, including Ethernet, switching and routing, essential for AI-driven data centers.

The rest of their semiconductor business—Sever Storage, Broadband, Wireless, & Industrial—has actually been declining. The semiconductor business in total is only 60% of Broadcom’s revenue. The other 40% in software is largely unrelated to the AI spend surge. So, while the AI story has driven investor excitement, it's only a small (but growing) part of what’s happening at Broadcom.

The VMware Acquisition and Its Impact

Broadcom’s acquisition of VMware has greatly inflated their revenue figures. Revenue for Q3 came in at $13 billion, up 47% year-over-year, but much of this growth is due to the acquisition, not organic business growth.

However, this jump in revenue did not come without a cost. Broadcom’s balance sheet has taken a hit as a result. Their net debt jumped from $25 billion to $60 billion. On top of that shareholders have been diluted by more than 10% with an increase in shares outstanding. Also, gross margins dropped from 68% to 56%, while net margins shrank to 16.9%. This is due to VMware being a much more low-margin business.

Is Broadcom Really an AI Stock?

Let’s address the elephant in the room. Broadcom is benefiting from the AI boom, but it’s primarily through their networking business, which supports data center infrastructure. So they benefit from the increased data center buildout. However, They aren’t a leader in AI like Nvidia, which has built its entire business around a high-margin AI data center business. Nvidia’s H100 and H200 GPUs are essential in AI processing, and comparing Broadcom’s AI-related products to Nvidia’s feels like apples to oranges.

Yes, Broadcom’s networking business is growing due to AI, but it’s not the core of their company, and I don’t think they have a significant competitive advantage in the AI space. The label "AI stock" doesn’t fully fit Broadcom in the way it does for companies like Nvidia.

Conclusion: A Great Company, But Overvalued

Broadcom is still a strong business, and if you’re a long-term investor there’s nothing wrong with continuing to reinvest dividends and ride out the highs and lows. But for those looking to jump in, I’d caution that much of Broadcom’s recent price increase has been driven by an overstated AI narrative. If you’re thinking of buying, I’d suggest taking a closer look at the fundamentals before making a decision.

Disclaimer: This is not financial advice. Please do your own research before making any investment decisions.

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— Zach

Disclaimer: Dividend Dividend (Dividend Data LLC) is not a professional financial service. All materials released from Dividend Data (Dividend Data LLC) are for educational and entertainment purposes. Dividend Data (Dividend Data LLC) is not a replacement for a professional's opinion. Contributors to the Dividend Data (Dividend Data LLC) might have equities mentioned in the newsletter