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An Unbelievable Chart for an Unbelievable Business

June 16, 2024

Charts don’t come much better than this. There are no golden cross buy signals on the 12M chart [each candlestick = 1 year] because the share price has never weakened enough to give one. Broadcom is in the semiconductor business and supplements growth with acquisitions, which are expertly absorbed into the group.

Revenue in the current year is running at around $50bn. Just for comparison in 2009, the chart’s beginning, it was $1.48bn. There was plenty of good news in the latest quarterly results.

“Broadcom’s second quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1bn during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds,” said Hock Tan, President and CEO of Broadcom Inc. “We are raising our fiscal year 2024 guidance for consolidated revenue to $51bn and adjusted EBITDA to 61pc of revenue.” 

“Consolidated revenue grew 43pc year-over-year to $12.5bn, including the contribution from VMware, and was up 12pc year-over-year, excluding VMware. Adjusted EBITDA increased 31pc year-over-year to $7.4bn,” said Kirsten Spears, CFO of Broadcom Inc. “Free cash flow, excluding restructuring and integration in the quarter, was $5.3bn, up 18pc year-over-year. Today we are announcing a ten-for-one forward stock split of Broadcom’s common stock, to make ownership of Broadcom stock more accessible to investors and employees.”

Broadcom, Q2 2024, 12 June 2024

VMWare was acquired in November 2023 and is part of Broadcom’s ambitious plans,

Hock Tan, President and Chief Executive Officer of Broadcom, said, “We are excited to welcome VMware to Broadcom and bring together our engineering-first, innovation-centric teams as we take another important step forward in building the world’s leading infrastructure technology company. With a shared focus on customer success, together we are well positioned to enable global enterprises to embrace private and hybrid cloud environments, making them more secure and resilient. Broadcom has a long track record of investing in the businesses we acquire to drive sustainable growth, and that will continue with VMware for the benefit of the stakeholders we serve.”

Broadcom’s focus moving forward is to enable enterprise customers to create and modernise their private and hybrid cloud environments. At the core, Broadcom will invest in VMware Cloud Foundation, the software stack that serves as the foundation of private and hybrid clouds. Incremental to Broadcom’s investment in VMware Cloud Foundation, VMware will offer a rich catalog of services to modernise and optimise cloud and edge environments, including VMware Tanzu to help accelerate deployment of applications, as well as Application Networking (Load Balancing) and Advanced Security services, and VMware Software-Defined Edge for Telco and enterprise edges.

Hok Tan, CEO, Broadcom, 22 November 2023

It is easy to understand why investors were excited by these results.

Q2 revenue of $3.8bn grew 44pc year on year, representing 53pc of semiconductor revenue. This was again driven by strong demand from hyperscalers for both AI networking and custom accelerators. It’s interesting to note that as AI data centre clusters continue to deploy, our revenue mix has been shifting toward an increasing proportion of networking. We doubled the number of switches we sold year on year, particularly the Tomahawk 5 and Jericho3, which we deployed successfully in close collaboration with partners like Arista Networks, Dell, Juniper, and Supermicro.

Additionally, we also doubled our shipments of PCI Express switches [PCI express switches is a device that switches PCI express (PCIe) buses on motherboards of computers or similar applications. PCIe is a switch-based technology used to interconnect a large number of peripheral devices to a processor system] and NICs [network interface controllers] in the AI back-end fabric. We’re leading the rapid transition of optical interconnects in AI data centres to 800 gigabit bandwidth, which is driving accelerated growth for our DSPs [digital signal processors] , optical lasers, and PIN diodes [A PIN diode is a diode with a wide, undoped intrinsic semiconductor region between a p-type semiconductor and an n-type semiconductor region]. And we are not standing still. Together with these same partners, we are developing the next-generation switches, DSP, and optics that will drive the ecosystem toward 1.6-terabit connectivity to scale out larger AI accelerated clusters.

Talking of AI accelerators. You may know, our hyperscale customers are accelerating their investments to scale up the performance of these clusters. And to that end, we have just been awarded the next-generation custom AI accelerators for these hyperscale customers of ours. Networking these AI accelerators is very challenging, but the technology does exist today in Broadcom, where the deepest and broadest understanding of what it takes for complex large workloads to be scaled out in an AI fabric.

Proven point, seven of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions. Next year, we expect all mega-scaled GPU deployments to be on Ethernet. We expect the strength in AI to continue. And because of that, we now expect networking revenue to grow 40pc year on year, compared to our prior guidance of over 35pc growth.

Hok Tan, CEO, Broadcom, Q2 2024, 12 June 2024

The general trend is onwards and upwards.

For fiscal ’24, we expect revenue from AI to be much stronger at over $11bn. Non-AI semiconductor revenue has bottomed in Q2 and is likely to recover modestly for the second half of fiscal ’24. On infrastructure software, we’re making very strong progress in integrating VMware and accelerating its growth. Pulling all these three key factors together, we are raising our fiscal ’24 revenue guidance to $51bn.

Hok Tan, CEO, Broadcom, Q2 2024, 12 June 2024

Asked about competition with Nvidia Hok Tan said:

We take the approach that we don’t do those GPUs but we enable the GPUs to work very well. So, if anything else, we supplement and hopefully complement those GPUs with customers who are building bigger and bigger GPU clusters.

Hok Tan, CEO, Broadcom, Q2 2024, 12 June 2024

The GPU boom is fantastic news for Broadcom. Here is a quote I didn’t fully understand but gives the flavour of the links between GPU spend and Broadcom’s networking business.

You almost say, for every $1bn you spend on GPU, you would spend on networking. And if you include the optical interconnects as part of it, though we are not totally in that market, except for the components like DSPs, lasers, PIN diodes that go into those high bandwidth optical connects.

But if you just take optical connects in totality, switching, all the networking components that attaches itself to clustering a bunch of GPUs, you probably would say that about 25pc of the value of the GPU goes to networking, the rest of networking. Now, not entirely all of it is my available market. I don’t do the optical connects, but I do the few components I talked about in it. But roughly, the simple way to look at it is probably about 25pc, maybe 30pc of all these infrastructure components is kind of attached to the GPU value point itself.

But having said that, we’re never that precise that deployment is the same way. So, you may see the deployment of GPUs or the purchase of GPU much earlier and the networking comes later or sometimes less often, the other way around, which is why you’re seeing the mix going on within my AI revenue mix. But typically, you run toward that range over time.

Hok Tan, CEO, Broadcom, Q2 2024, 12 June 2024

Strategy – One for Your Portfolio and Looks Like a Never-Sell

If I say I don’t fully understand what Broadcom does that is an understatement; I don’t have a clue. But it feels like a great business and successful serial acquirers, especially ones as focussed as Broadcom, can grow rapidly for a long time. As the company gets bigger the deals get bigger but there is less competition for the bigger deals and nobody in the semiconductor space seems to have a business model like Broadcom, though Nvidia did try to buy Arm Holdings.

I found this interesting summary of why Broadcom is a great investment.

Broadcom has a strong and demonstrable competitive advantage. Unit shipments are exploding, the company is winning designs for next-gen custom silicon, and many of the leading AI factories are networked with Broadcom hardware. This company exists at the centre of a very rosy long-term picture. We are amidst a hardware spending megacycle powered by AI. A huge acceleration in AI revenue cancelled out broad based cyclical slowdowns in other segments for the company. Management expects these cyclical headwinds to turn more positive throughout the remainder of 2024, and with AI spend expected to remain robust moving forward, the 2025 picture remains extremely positive. Further, the VMware integration is going very well as the company continues to cut down on complexity and costs while simplifying product offerings for customers.

Broadcom was in the perfect place at the perfect time to reap the benefits of the blossoming AI industry. While Nvidia is powering AI, Broadcom is connecting it. The company is consistently de-levering and executing flawlessly at scale while investing heavily to maintain its compelling lead. I reiterate my Buy rating on Broadcom.

Seeking Alpha, The Value Edge, 13 June 2024

Share Recommendations

Broadcom. AVGO. Buy @ $1735

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