To The Moon

• Broadcom $Broadcom(AVGO)$ has garnered investors' interest since its announcement of a 10-for-1 stock split and its earnings beat in Q2 2024.

• The stock price has soared 43% year-to-date and is currently one of the best-performing semiconductor stocks.

• Broadcom is a global technology company that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions for data centers, networking, broadband, wireless, and storage markets. Its customers include Apple, Bytedance, Amazon, and Google.

Things you should know about Broadcom:

1) Uneven Recovery in Revenue Growth:

• Total Revenue increase increased by 43% yoy in 2Q2024. But if we exclude VMware, total revenue was merely up 12% year on year, and this 12% organic growth in revenue was largely driven by AI revenue.

• To put it simply, VMware and AI revenue (mostly contributed by Networking) will be the main focus for investors.

• The company operates through two reporting segments: Semiconductor Solutions and Infrastructure Software.

A) Semiconductor Solutions

• The Semiconductor Solutions segment grew 6% year-over-year in 2Q2024.

• Operating margin was 55% in 2Q2024.

• With the exception of Networking, other sub-segments either saw flat growth or a decline in 2Q2024.

• Networking revenue, driven by AI demand, is expected to offset cyclical weaknesses in other semiconductor revenue segments.

• Networking revenue, comprising 30% of total revenue, surged 46% year-over-year in 2Q2024 and is projected to grow 40% year-over-year in FY2024, up from previous guidance of 35%.

• Broadcom holds a dominant 80% market share in the $5-7 billion datacenter/AI Ethernet switching and routing chipset market.

B) Infrastructure Software:

• Infrastructure Software revenue soared 175% year-over-year, primarily due to VMware, accounting for 42% of total revenue.

• Operating margin was 60% in 2Q2024, down from 73% in 2Q2023, mainly due to VMware's inclusion following Broadcom's acquisition. It is unsurprising, considering VMware's operating margin was merely 16.05% in 2Q2024.

a) Broadcom Software:

• Broadcom's software revenue, contributing 21% of total revenue, rose 34% year-over-year in the latest quarter.

• Wall Street expects a 20% increase in the next quarter.

b) VMware:

• Wall Street forecasts VMware revenue to rise by 20% in the upcoming quarter.

• As of late 2022, VMware held approximately 42% of the hyperconverged infrastructure (HCI) market, followed by Nutanix with 25%, according to IDC.

 2) AI Revenue Growth Acceleration:

• Broadcom entered the AI-accelerated data center sector significantly with its Jericho3 chip, designed to connect up to 32,000 high-compute GPUs. Broadcom's networking solutions are enhancing AI-driven software and systems by reducing tail latency and accelerating computation and decision-making processes.

• AI revenue accounted for less than 5% of total semiconductor revenue during 2019-2021. Contributions rose to around 10% and 15% in 2022 and 2023, respectively.

• In 2024, AI revenue is expected to contribute 35% of total semiconductor revenue, amounting to USD 10 billion in AI revenue, reflecting a 137% year-over-year growth.

• The recent 2Q2024 quarterly report shows AI revenue at USD 3.1 billion, marking a 280% year-over-year growth.

3) Acquisition Strategy:

Broadcom's strategic acquisitions have bolstered its revenue. The company has a long and successful track record of acquiring valuable businesses in the past, including Broadcom (Avago acquired Broadcom and subsequently rebranded as Broadcom), CA, and VMware. Broadcom also attempted to acquire Qualcomm, but the deal was blocked by U.S. President Donald Trump.

4) Stock Split:

• Broadcom recently announced a 10-for-1 stock split (similar to Nvidia's split), effective after the market closes on July 12.. Nvidia's stock surged 27% between the announcement and the split date.

• Since announcing the split on June 13, Broadcom's stock has risen by 6.47%.

Technical Analysis

• Based on Fibonacci Extension, the major resistance levels include 1593, 1712, 1903, 2039, 2111, and 2213.

• Major support levels include 1538, 1402, 1295, 1210, and 1108.

• Broadcom has corrected by 12.94% from yesterday’s closing price of 1592.21. In comparison, the correction from March to April was 14.38%, primarily due to unrest in the Middle East.

• I reckon the correction since June 18th was unwarranted as there have been no major fundamental changes within the company itself.

   

Conclusion:

• Broadcom may start attracting more interest from retail investors after the stock split, given its current trading price of USD1592, which may be considered less affordable for retail investors at the moment.

• AI revenue is expected to contribute 35% of Broadcom's total semi revenue this year, whereas TSMC $Taiwan Semiconductor Manufacturing(TSM)$ anticipates AI contributing to more than 20% of its 2028 revenue. Therefore, Broadcom stands to benefit significantly from AI, relative to its peers.

• I am constructive about Broadcom's long-term prospects, but retail investors might consider limiting their exposure in Broadcom to less than 5% in an aggressive portfolio due to the complex competitive landscape in Broadcom's B2B market.

• According to Bloomberg analysts, the consensus 12-month target price for Broadcom is USD1878.59, indicating a potential upside of 18% from yesterday’s closing price of USD1592.21.