Broadcom (AVGO, Financial) experienced a decline in its stock value today, despite reporting significant gains in both revenue and profits for the first quarter (January) and maintaining its revenue forecast for the fiscal year 2024 (October). Following the announcement of its Q1 results, the company's shares dropped sharply, at one point decreasing by 9%.
The dip in Broadcom's shares can be attributed to a rapid increase in its stock price, which surged by nearly 30% since the beginning of the year and 50% since the Q4 results in early December. This swift rise heightened the likelihood of profit-taking. Additionally, despite the booming AI sector, Broadcom's other end markets are facing challenges. The company's FY24 sales projection remains at approximately $50.0 billion, even though AI now represents 35% of its total semiconductor revenue, a 10 percentage point increase from the previous quarter. This situation raises concerns as demand in other divisions has either significantly declined or remained unchanged.
Nevertheless, Broadcom has greatly benefited from the ongoing high demand for AI, which is expected to continue strengthening throughout the year. The excitement surrounding AI has helped mitigate the impact of weaker sales in other areas, preventing a further decline in the company's stock price.
- In Q1, Broadcom's AI revenue quadrupled year-over-year to $2.3 billion, compensating for the slowdown in enterprise software and telecoms. The Semiconductor Solutions segment saw a 4% increase to $7.4 billion, while the Infrastructure Software segment, bolstered by the VMware integration, surged by 153% to $4.6 billion, with VMware contributing 132 percentage points to this growth. Overall, Broadcom's revenue rose by 34.2%, or 11.0% excluding VMware, reaching $11.96 billion.
- The $69.0 billion acquisition of VMware, initially met with skepticism, is beginning to yield benefits, especially in AI. Broadcom expects VMware's revenue to grow by double digits sequentially throughout FY24, supported by a partnership with NVIDIA (NVDA, Financial) that enhances AI capabilities through Virtual Cloud Foundation running GPUs.
- For the upcoming year, Broadcom projects significant growth in its Semiconductor business lines, with networking (including AI) expected to grow over 35% year-over-year. However, server storage and broadband are anticipated to decline by mid-20 percent and 30%, respectively, while wireless and industrial resales are projected to remain flat or decrease by high-single digits.
Today's market reaction to Broadcom's performance mirrors the response to its previous quarter's results. Given the strong interest in AI, it's possible that Broadcom's stock will continue to rise. However, considering the stock's recent rapid growth, investors are advised to proceed with caution, especially given the stagnant or worsening demand in non-AI sectors.
