Broadcom's shares are climbing in after-hours trading following the release of their Q4 earnings report. We'll break down those Q4 results and discuss the company's Q1 guidance. Additionally, we'll examine how the VMware acquisition has impacted Broadcom's financials, particularly in terms of debt, new clients, and employees. Cost-cutting measures and synergy efforts are also worth noting.
The semiconductor segment, which draws considerable attention, has been performing exceptionally well both year-over-year and quarter-over-quarter. We’ll analyze the key financial metrics, including cash flows and technical performance, especially since we recommended Broadcom on our Equity Empire Channel three weeks ago. The stock is currently up about 5% after hours, and we'll see if that momentum holds through tomorrow.
Broadcom's business is divided into two segments:
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Semiconductor Solutions: $8.23 billion (59% of revenue), up 12%.
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Infrastructure Software: $5.82 billion (41% of revenue), up 196%, driven by VMware.
Earning Overview
Broadcom recently released its latest quarterly results, and as expected, the company delivered another stellar performance. The strong earnings report was accompanied by promising guidance, driving the stock price up by 13.3% to an all-time high of $24.50 per share at the time of this recording. Year-to-date, Broadcom’s stock has climbed by approximately 70%, pushing the company’s market capitalization closer to the $1 trillion mark. In addition to these impressive gains, Broadcom announced an 11% dividend increase, making it an appealing dividend stock for investors.
Fundamental Analysis
Broadcom also announced a dividend increase of 11.3%, benefiting shareholders. The company made headlines with its ongoing partnership with Apple to develop in-house AI server chips, aligning with Apple's push for Apple Intelligence and reduced reliance on third-party servers. However, there's potential for Apple to replace Broadcom’s Wi-Fi and Bluetooth components with in-house designs, though similar past situations have often resolved in Broadcom’s favor.
Semiconductor revenue reached a record $30.1 billion, with AI-related revenue surging 222% year-over-year to $12.2 billion. The networking segment, particularly driven by AI and GPU-like chips, remains a strong growth driver. In Q4, semiconductor solutions revenue rose 12% year-over-year to $8.2 billion, while infrastructure software revenue, boosted by the VMware acquisition, grew 190% to $5.8 billion.
Broadcom's balance sheet reflects the acquisition's impact, with debt rising from $37 billion to $66 billion over the past year. However, the company is steadily paying down this debt, supported by strong operating cash flow of $5.6 billion in the latest quarter. Broadcom continues to prioritize shareholder returns through dividends and buybacks, while maintaining disciplined spending on operations and infrastructure.
Guidance
If you've held Broadcom shares this year, you’ve likely seen solid returns — the stock is up 61% year-to-date and is on track to reach a $1 trillion market cap. For Q4, Broadcom’s revenue aligned with Wall Street expectations at $14.06 billion. Their Q1 guidance of $14.6 billion slightly surpassed estimates of $14.55 billion.
AI-related opportunities and increasing demand for custom silicon are key drivers for future cash flow growth.
For the full year 2024, Broadcom highlighted record semiconductor revenue of $30.1 billion, fueled by AI revenue reaching $12.2 billion, a 220% year-over-year increase driven by their AI XPUs and Ethernet networking products.
Free Cash Flow
Broadcom has consistently delivered strong free cash flow growth, supported by its semiconductor solutions and infrastructure software businesses. In the most recent fiscal year (2024), free cash flow grew significantly, but for the purpose of forecasting, let's focus on a more moderate long-term growth rate.
Assumptions for Forecasting FCF Growth Rate: Based on historical growth, let's assume Broadcom will experience an average annual free cash flow growth rate of around 10-12% over the next 10 years. This takes into account factors like AI growth, strong demand for semiconductors, and the integration of VMware. Starting Point: Broadcom's free cash flow for the most recent fiscal year (2024) was approximately $21.9 billion. Let's use this as the base for the calculation.
Technical Analysis
Technically, Broadcom’s long-term chart remains strong, showing an upward trend since 2010. While currently at the upper end of its channel, historical patterns suggest the potential for continued growth. If market pullbacks occur, these may present attractive buying opportunities.
Risks and Challenges
Before the earnings report, analysts expressed concerns about declining demand in Broadcom's chip design business, pointing to delays in the rollout of a new Broadcom processor for Alphabet Inc.
Apple, a major Broadcom customer, relies on the company for key iPhone components. During earnings calls, Broadcom CEO Hock Tan typically references Apple indirectly as the company’s “large North American customer” or uses similarly vague terms when discussing their sometimes-strained relationship.
Earlier, Bloomberg News reported that Apple plans to transition away from a critical Broadcom wireless chip starting next year. This move is part of Apple’s broader strategy to replace third-party components with in-house designs, a shift that is also expected to affect Qualcomm Inc.
Valuation
To justify the current valuation, Broadcom’s free cash flow is expected to grow by approximately 14.1% annually over the next 10 years.
Price-to-Earnings (P/E) Ratio: Broadcom currently trades at a forward P/E of approximately 157x, reflecting elevated expectations driven by its AI growth potential and recent VMware acquisition. This is above its 5-year mean of around 17-20x, indicating a premium valuation relative to its historical average.
Price-to-Sales (P/S) Ratio: The P/S ratio stands around 18x, also higher than its historical average due to anticipated revenue growth in AI and infrastructure segments.
Dividend Yield: Broadcom offers a dividend yield of approximately 2.0% following a recent 11% dividend increase.
Fair Value Estimate: Based on current free cash flow projections and growth expectations, Broadcom's fair value is estimated between $220 and $250 per share, depending on the growth rate assumption.
Market sentiment
CEO Hock Tan’s focus on cost control is evident in reduced R&D and SG&A expenses, further improving margins and profitability. Despite high interest expenses due to recent borrowing, Broadcom's ability to generate substantial cash flow positions it well for future growth and potential acquisitions.
AI Revenue Momentum: AI-related revenue grew by 220% YoY to $12.2 billion for FY 2024, driven by demand for Broadcom’s AI XPUs and Ethernet networking solutions. The projected Serviceable Addressable Market (SAM) for AI-specific ASIC customers is estimated to reach $60-90 billion by FY 2027, reflecting significant long-term opportunities.
Successful VMware Integration: The acquisition of VMware has significantly bolstered Broadcom’s infrastructure software segment, which grew 196% YoY to $5.82 billion. Investors view the integration as a positive step in diversifying Broadcom's revenue streams.
Conclusion
Broadcom remains a dominant player poised for future growth, particularly in AI and custom chip solutions. If you're holding the stock, congratulations on the gains and dividends. For new investors, caution may be warranted at these all-time highs.
Broadcom’s free cash flow is expected to grow at 14.1% annually over the next decade to justify its current price. While the growth outlook remains strong, the risk-reward balance is less attractive compared to when the stock was trading around $130-$140. Broadcom’s free cash flow is expected to experience significant growth over the next decade, driven by AI expansion, the semiconductor boom, and continued strong demand for its infrastructure software. A 10% annual growth rate suggests FCF could more than double over the next 10 years.
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