Broadcom, the renowned chip manufacturer, stands poised for an optimistic outlook regarding its upcoming quarterly financial results, fueled significantly by advancements in artificial intelligence and its strategic partnership with VMware. According to insights from Oppenheimer, the company is set to disclose its fiscal third-quarter results on Thursday, with analysts projecting earnings of $1.23 per share and revenues approximating $12.88 billion.
In contrast, analysts surveyed by Capital IQ are forecasting earnings of $1.20 per share, coupled with a slightly higher revenue expectation of $12.96 billion. Oppenheimer's analysis suggests that Broadcom's semiconductor and software sectors are gearing up for sequential growth this quarter, particularly highlighting an anticipated 7% year-over-year increase in the semiconductor division.
This momentum within the semiconductor market, especially in networking, is expected to be spurred by the cloud service providers' ever-increasing demand for custom AI application-specific integrated circuits (ASICs) as well as Ethernet switching solutions. The wireless segment, meanwhile, is anticipated to experience both sequential and annual growth ahead of the launch of Apple’s latest iPhone 16, a crucial event that may significantly influence consumer buying behavior and subsequently, Broadcom's sales. However, the analysis paints a more cautious picture for the company's server and storage operations within the wireless sector, which are predicted to experience an annual decline during the third quarter.
Nonetheless, a ‘modest’ recovery is expected in the latter half of the year, as noted by Oppenheimer's analysts, including Rick Schafer, Wei Mok, and Dustin Fowler. The broadband segment appears to be nearing its lowest point this quarter, with the analysts suggesting a recovery could commence in January. Broadcom’s strategy to drive VMware growth centers on converting existing perpetual licensing customers to a software-as-a-service (SaaS) model upon contract renewal.
Management’s outlook points toward a period of sustained growth over the next three years, primarily as these multiyear contracts start to renew. Back in May 2022, Broadcom made headlines with its decision to acquire multi-cloud services provider VMware in a monumental $61 billion deal, which successfully concluded last November.
As of now, Oppenheimer reports that nearly one-third of VMware's 10,000 target clientele has already transitioned to this new model. This year, the financial contribution stemming from AI activities to Broadcom’s overall performance is anticipated to surpass $11 billion, a notable increase from the $7.5 billion projected at the year’s outset.
Broadcom is reportedly securing a dominant position in the custom ASIC market, a significant chunk of which is driven by sales to industry giants including Alphabet, Meta Platforms (the parent company of Facebook), and ByteDance, the parent company of TikTok. Furthermore, it's noteworthy that Broadcom and Marvell Technology are both considered serious contenders for the Microsoft-backed OpenAI accelerator, reflecting the company’s strong standing in the tech innovation landscape. The analysts also indicated that Broadcom's wireless sector, often referred to as its ‘cash cow,’ is likely to show flat performance this year.
However, there exists a considerable opportunity for VMware sales to exceed $4 billion on a quarterly basis by the year’s conclusion as conversion to the SaaS model takes further hold. On Friday, Broadcom’s shares witnessed a 2% increase in trading, marking a remarkable 43% rise in value since the start of the year. Oppenheimer has recognized Broadcom as the “top AI play” in the market, following Nvidia, undoubtedly positioning it as a strategic investment for the foreseeable future.
The analysts underscored that the core strengths across networking, wireless, broadband, server/storage, and software domains foster a steady trajectory of sustainable growth and shareholder return. Consequently, they reiterated their long-term bullish stance on Broadcom shares. In alignment with this perspective, Oppenheimer reaffirmed its outperform rating for Broadcom's stock and has established a price target of $200, reflecting confidence in the company’s strategic direction and market potential..