To The Moon

Broadcom (AVGO) is set to announce its earnings for Q4 FY2024 after the market closes on December 12th, Eastern Time. Investors are encouraged to stay tuned.

Institutional Projections

Broadcom is expected to achieve revenue of $14.066 billion for Q4 FY2024, marking a 51.33% year-over-year increase, while earnings per share (EPS) are projected at $0.70, reflecting a 14.91% year-over-year decline.

Performance Highlights

Underpinned by the demand from tech giants, Broadcom has propelled its growth in the communications chip industry through a strategic mix of AI chips, communication transmission technology, and cloud virtualization software. This has driven both operating performance and stock price surges, briefly positioning Broadcom among the top ten U.S. companies by market capitalization at over $850 billion.

Business Breakdown

Broadcom categorizes its AI ASIC and AI-focused networking solutions under its "AI accelerators" segment. In Q2 FY2024, Broadcom’s AI revenue reached $3.1 billion, accounting for 43% of its semiconductor business revenue, a staggering 280% year-over-year increase. Thanks to this robust AI performance, Broadcom’s market capitalization has risen 60% year-to-date in 2024, now exceeding $830 billion.

For FY2024, Broadcom anticipates that robust AI growth will offset cyclical weaknesses in broadband and server storage, leading to mid- to high-single-digit revenue growth. The company expects $30 billion in semiconductor revenue, of which over $10 billion will stem from AI-related products.

Broadcom has also forged strong partnerships with hyperscale enterprises like ByteDance, jointly developing custom chips to enhance technological competitiveness.

Broadcom's Options Market Insights

• The average implied volatility (IV) suggests a ±5.0% move post-earnings, while the actual average price movement has been ±5.3% over the past six quarters.

• The stock’s movements following the past six earnings reports were: +2.8%, -5.5%, +2.4%, -7%, +12.3%, and -10.4%.

  

• For its most recent earnings report, Broadcom’s 30-day IV (IV30) was 49.5 pre-earnings and dropped to 44.5 post-earnings, representing a 10% decline in implied volatility.

• Currently, the options market expects a ±6.9% move post-earnings, creating an opportunity for a short volatility strategy.

What Is a Strangle Strategy?

Long Strangle:

Investors purchase:

• An out-of-the-money (OTM) call (strike price above the current price).

• An OTM put (strike price below the current price).

This strategy offers unlimited upside if the stock price rises and potential profits from a significant drop, with risks limited to the premium paid for both options.

Short Strangle:

Investors sell:

• An OTM call.

• An OTM put.

This neutral strategy generates income from premiums and profits when the stock price remains within a narrow range. However, risks are substantial beyond the breakeven points as the stock moves sharply in either direction.

AVGO Short Strangle Example

Stock Price (Current): $172
Strategy Setup:

• Sell a $190 strike call (expiring Dec 13): Premium = $117

  

• Sell a $160 strike put (expiring Dec 13): Premium = $145

  

  
  Total Premium Income: $117 + $145 = $262

Profit and Loss Analysis

• Maximum Profit: $262 (total premium income), achieved if the stock expires between $160 and $190.

• Maximum Loss: Theoretically unlimited.

  • Upside Risk: If the stock rises above $190, losses occur as (actual price - $190) - premium.

  • Downside Risk: If the stock falls below $160, losses occur as ($160 - actual price) - premium.

Breakeven Points:

• Upside Breakeven: $190 + $2.62 = $192.62

• Downside Breakeven: $160 - $2.62 = $157.38

Risk-Reward Considerations

• Advantages: Premium income provides a buffer against small stock movements. Profits if the stock remains within the breakeven range.

• Risks: Sharp price movements beyond breakeven points could result in significant losses.

• Best Scenario: When AVGO’s actual post-earnings volatility is less than expected.

This strategy suits market conditions where AVGO is expected to experience less volatility than implied by the options market, but close monitoring is necessary as the stock approaches the strike prices.