Share prices of Broadcom (AVGO +1.19%) hit record highs after news came out that revenue surged in the chipmaker's fiscal second quarter and that the company will be executing a stock split. Broadcom's stock price has now more than doubled over the past year.
Let's take a look a the company's most recent quarterly results and whether or not it is too late to buy the stock.
NASDAQ: AVGO
Key Data Points
AI and software lead the way for Broadcom in Q2
For fiscal 2024's second quarter (ended May 5), Broadcom's revenue climbed 43% year over year to $12.5 billion. Excluding its VMware segment, revenue rose 12%. Broadcom completed its $69 billion acquisition of VMware last November. AI revenue surged 280% year over year to $3.1 billion. Semiconductor solutions revenue rose 6% year over year to $7.2 billion. Networking revenue soared 44% to $3.8 billion, while wireless revenue edged up 2% to $1.6 billion.
On the downside, server storage connectivity revenue in Q2 dropped 27% year over year to $824 million, while broadband revenue sank 39% to $730 million due to continued cyclical weakness from enterprises and telcos. Broadcom management said that Q2 service storage revenue was at the bottom of its current cycle and growth would improve in subsequent quarters, while broadband revenue will bottom in the second half of the year with a recovery in 2025.
Infrastructure software revenue soared 175% year over year to $5.3 billion thanks, in part, to VMware contributing $2.7 billion to the total. That VMware contribution was up from $2.1 billion in Q1, and the company expects VMware revenue to accelerate toward a $4 billion quarterly run rate. The company said it is making good progress in transitioning all VMware products into a subscription licensing model. It noted that it has already signed up about 3,000 of its largest 10,000 customers to build a self-service virtual private cloud on-premise.
Adjusted earnings per share rose on the quarter from $10.32 to $10.96. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 31% year over year to $7.4 billion. Broadcom generated $4.6 billion in cash flow from operations in the quarter. Free cash flow came in at $4.4 billion. The company ended the quarter with $9.8 billion in cash and equivalents and $74 billion in debt stemming from the VMware acquisition.
Looking ahead, management forecast full-year revenue of approximately $51 billion. It is looking for adjusted EBITDA to be about 61% of revenue, which would equal about $31.1 billion. That full-year forecast is up from a prior outlook of $50 billion in revenue and adjusted EBITDA of 60% of revenue, or $30 billion. It is looking for its AI-related revenue to grow to $11 billion this fiscal year.
The company also announced a 10-for-1 stock split as well as a $5.25 quarterly dividend. The stock is expected to start trading on a split-adjusted basis on July 15.
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Is it too late to buy Broadcom stock?
Overall, there are clearly some parts of Broadcom's business that are strong, such as those related to AI networking and AI accelerators. The company is leading the charge in the rapid transition of optical interconnects in AI data centers to 800-gigabit bandwidth. It expects all mega-scale GPU deployments to be on Ethernet next year, which greatly benefits the company. Meanwhile, it's also doing a nice job transitioning VMware customers from a perpetual license model with many end products to four core solutions offered on a subscription model basis.
At the same time, the rest of Broadcom's business has been struggling, as seen by the big declines in revenue growth in the server storage and broadband businesses. These businesses tend to be more cyclical and can be tied to spending cycles.
Trading at a forward price-to-earnings (P/E) ratio of over 38, Broadcom's stock is not cheap for a company that grew its revenue just 12% year over year on an organic basis and is loaded with debt.
While its AI-related growth is strong, it only currently makes up about a quarter of its total revenue. Meanwhile, a large part of its business tends to be more cyclical in nature and has been in decline recently.
Broadcom should be a winner in the AI space, but overall the stock looks pricey, especially compared to a company like Nvidia, which has been growing at a much faster rate and is debt-free.
AVGO PE Ratio (Forward) data by YCharts
As such, I think it is probably a little too late to jump into the stock at the moment, and I prefer Nvidia in the semiconductor space.
