To The Moon

After-hours trading yesterday, semiconductor giant $Broadcom(AVGO)$ announced its second-quarter results of the fiscal year 2024, corresponding to the three months as of May 5 this year.

Broadcom's stock price soared 14.57% following the earnings release, adding $100.9 billion to it smarket cap, bringing the total to $793.3 billion, approaching the $800 billion mark!

After this incredible rally, can Broadcom hit a trillion-dollar market cap?

1.Revenue

Looking at the financials, Broadcom's revenue was $12.487 billion, exceeding analyst expectations of $12.057 billion, a year-on-year surge of 43%. Much of this was due to the inclusion of $VMware(VMW)$ 's revenue following Broadcom's mega-acquisition. Excluding this, Broadcom's organic growth was still impressive at 12%.

Broadcom is the world's largest WLAN chipmaker, with two main business segments:

• Semiconductor solutions account for 58% of revenue, with networks, wireless, storage, broadband, industrial, and automotive contributing 53%, 22%, 11%, 10%, and 4% respectively.

• Infrastructure software makes up 42% of revenue, primarily comprising acquired companies like Brocade (storage area networking), Symantec (internet security), CA Technologies (IT management software), and VMware (cloud computing and hardware virtualization software and services).

While Broadcom doesn't sell $NVIDIA Corp(NVDA)$ 's popular AI chips, but training large AI models requires tons of GPUs, NPUs, LPUs, or XPUs from Nvidia, $Advanced Micro Devices(AMD)$ , and others. Connecting these high-performance chips and transferring data between them requires network chips – Broadcom's forte. And this is why Broadcom's benefiting so much from the AI wave.

2.Segments Performance

Moreover, data center providers rely on Broadcom's custom chip designs and network semiconductors to build AI systems. That's why Wall Street analysts have Broadcom as the second-biggest AI chip stock winner, next only to Nvidia.

For the second quarter of fiscal year 2024, Broadcom's semiconductor solutions revenue hit $7.2 billion, an increase of 5.8%, and infrastructure software revenue was $5.285 billion, up 174.5% :

In the semiconductor solutions segment,

• Network revenue was $3.8 billion, a 44% jump year-on-year! It's mainly driven by the massive demand for AI networking and ASICs from hyperscale cloud providers.

• Switch chip sales, particularly the Tomahawk 5 and Jericho3 – approximately doubling year-over-year! AI backend network PCIe switch chip and NIC shipments did the same! Broadcom noted that seven of the eight largest AI clusters currently use Broadcom's Ethernet solution, and by next year, the company expects all hyperscale GPU clusters to use Ethernet protocols.

But other segments of the semiconductor Solutions performed poorly.

• Wireless revenue hit $1.6 billion, up 2% year-over-year and down 19% sequentially;

• Server storage connectivity revenue was $824 million, down 27% year-over-year, with a modest recovery expected in the second half of the year;

• Broadband revenue was $730 million, down 39% year-over-year, primarily due to continued stagnation in telecom and service provider spending.

On the infrastructure software,

Vmware's revenue was $2.7 billion, an increase of $700 million from the first quarter of fiscal year 2024, is expected to be in line with Broadcom's traditional software business operating margin in fiscal year 2025.

3.AI Driver

Broadcom AI revenue was $3.1 billion, a mind-blowing 280% surge! So, Broadcom's second-quarter highlights were clearly AI-driven, while other traditional segments are still in the early stages of recovery.

Looking ahead, Broadcom has upped their AI revenue forecast for fiscal 2024 from $10 billion to $11 billion, and overall revenue to $51 billion, compared with analysts' previous expectations of $50.6 billion.

Overall, Broadcom's riding high on both traditional business recovery and exploding AI demand. But with the hefty depreciation and integration costs from the Vmware acquisition, profits have taken a hit, with a 39% dip in net income in the second quarter of fiscal 2024 to $2.12 billion.

That makes Broadcom's current PE ratio sky-high at 56 times! But analysts are expecting those Vmware integrations to unleash profits, forecasting revenue of $58.4 billion and adjusted net income of $28.5 billion for fiscal 2025. Even after this surge, Broadcom's forward PE ratio is just 28 times. It's not an exaggeration!

From this point of view, Broadcom might just have what it takes to hit that trillion-dollar market cap!