Broadcom Earnings Preview: AI-Driven Growth and VMware Integration in Focus

$Broadcom(AVGO)$   will report its first-quarter fiscal year 2025 financial results on March 6, 2025, after the market closes. This will offer investors a critical opportunity to assess the sustainability of its AI-driven growth strategy and the effectiveness of its VMware integration.

Consensus Estimates

Broadcom has guided to revenue of approximately $14.6 billion for the first quarter earnings of its 2025 fiscal year. This would represent a 22% increase on the same period last year.

EPS is estimated to be $0.845, up 197.36% YOY.

The surge in AI revenue boosts Semiconductor Solutions revenue

Broadcom announced strong fourth-quarter results on December 12, 2024. The semiconductor segment contributed $8.23 billion, or 59% of total revenue, a 12% increase year over year. This growth was primarily driven by AI-related products, which offset weakness in traditional semiconductor lines.

Within the semiconductor portfolio, AI-related revenue was particularly strong. From less than 5% in 2019, AI revenue now accounts for 41% of the total Semiconductor segment revenue and has surged 220% year-over-year to $12.2 billion. This exceptional growth underscores Broadcom's successful positioning in custom AI XPUs (accelerated processing units) and Ethernet networking solutions for hyperscale data centers.

The company currently has three hyper-scale customers with a major AI roadmap to be executed over the next three years. In 2027, the company expects each of these customers to deploy one million XPU clusters. This translates into a Serviceable Addressable Market (SAM) for XPUs and network in the range of $60-90 billion by 2027. AVGO is well positioned to capture a leading market share in this opportunity.

Moreover, the company has been selected by two more hyperscalers who are developing their own next-generation AI XPUs. If these prospects get converted into customers, the SAM will expand significantly.

However, according to a post by insider Jukanlosreve on X, Broadcom's ByteDance AI accelerator project was canceled amid tightened US semiconductor restrictions on China, which is estimated to incur losses of $2 to $3 billion.

VMware acquisition bolstered the Infrastructure Software segment

The infrastructure software segment, bolstered significantly by the VMware acquisition, generated $5.824 billion in Q4 FY2024, representing 41% of total quarterly revenue and an impressive 196% increase year-over-year. For the full fiscal year 2024, infrastructure software revenue reached $21.478 billion, up 181% from the previous year. This dramatic expansion reflects the transformative impact of the VMware integration, which has diversified Broadcom's revenue streams and reduced its exposure to semiconductor market cyclicality.

According to Bloomberg, revenue forecasts for the Infrastructure Software segment point to $6.476 billion, representing a 42% year-over-year (YoY) growth.

DeepSeek put brakes on multi-year rally

Over the last five years, Broadcom has delivered stellar returns for its shareholders. The stock has delivered ~615% returns, as compared to ~80% for the $S&P 500(.SPX)$  .

However, this rally got stalled by the news related to the Chinese AI lab DeepSeek. Broadcom stock plunged 17% on January 27, 2025, as DeepSeek’s more efficient approach pose challenges for the conventional wisdom that bigger and more expensive necessarily means better relating to the AI development. $NVIDIA Corp(NVDA)$  's stock price also plummeted 16.97% on that day. If the rise of DeepSeek results in a downturn for premium AI chips it could create a domino effect for AVGO's technologies and components.

Nevertheless, the impact of DeepSeek has dual aspects. According to Jevons’ paradox - lower application costs leading to a more prosperous application ecosystem – this will ultimately result in the AI industry requiring more computational power, especially on the inference side. So, from the perspective of overall computational power, DeepSeek's impact may be positive.

What are the signals from the options market?

In the last 12 quarters, the predicted move after earnings announcements averaged ±5.3%, compared to an actual average earnings move of 6.7% (in absolute terms). This shows that AVGO tended to be more volatile than the options market predicted for the earnings stock price reaction.

This time, the options market has raised its expected move to ±10.60%, still expecting an increase in fluctuations.

From the perspective of implied volatility skew, market sentiment is Very Bearish on Broadcom.

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