TL;DR:
- Broadcom predicts a doubling of sales tied to artificial intelligence (AI) this year, aiming to capitalize on the AI frenzy.
- AI-related chip sales could account for over 25% of Broadcom’s total revenue.
- Despite AI gains, Broadcom expects less than 5% growth in total revenue this quarter, signaling a broader slowdown.
- The company faces an industrywide slump in tech demand, with growth decelerating from the pandemic-driven surge.
- Broadcom’s CEO, Hock Tan, uses a common tactic of highlighting AI gains but has yet to match Nvidia’s remarkable sales increase.
- While Broadcom grows in a weakening market, Nvidia predicts a sales jump of over 60%.
- Broadcom’s networking components and custom chips cater to the demand for AI services in data centers.
- The company’s shares have surged by 41% in 2023, making it one of the top-performing semiconductor stocks.
- Broadcom’s Q2 profit stood at $10.32 per share, with revenue increasing by 7.8% to $8.73 billion, falling below the 10% growth threshold.
- Broadcom anticipates maintaining full order books for the fiscal year, despite an inventory glut and customers postponing new orders.
Main AI News:
In the midst of a broader industry slowdown, Broadcom Inc. foresees a promising future for its artificial intelligence (AI) endeavors. The chipmaker expects a twofold increase in sales tied to AI this year, capitalizing on the widespread frenzy that has propelled other tech giants like Nvidia Corp. While the growth in AI-related chip sales is anticipated to account for more than a quarter of Broadcom’s total revenue, the company’s overall sales projection for this quarter indicates a less than 5% increase, reaching approximately $8.85 billion. Although exceeding the analyst estimate of $8.76 billion, this represents the slowest growth rate for Broadcom in recent years, as it grapples with an industrywide slump in tech demand and a deceleration in growth following a surge during the pandemic.
Broadcom CEO Hock Tan has adopted a common tactic employed by tech companies by highlighting the gains in AI, yet his efforts have not yet matched the dramatic increase witnessed by his counterpart Jensen Huang at Nvidia. While Broadcom may be experiencing growth within a weakening market, Nvidia has predicted a staggering sales surge of more than 60%. Although Tan’s remarks about AI momentarily buoyed Broadcom’s shares in the after-market, they later receded to a 2.3% decline by the end of the day.
Broadcom’s networking components play a crucial role in directing traffic within large-scale data centers, while also producing custom chips for major cloud computing providers. These customers are in a race to expand their capacity to accommodate the rising demand for AI services, a trend that recently propelled Nvidia to near the $1 trillion valuation threshold. The anticipation surrounding Broadcom’s growth prospects has propelled its shares up by 41% since the beginning of the year, solidifying its position as one of the top-performing semiconductor stocks in 2023.
Despite surpassing Wall Street estimates, Broadcom’s report failed to impress investors, dampening the initial excitement surrounding the company. In the second quarter ending April 30, Broadcom’s profit stood at $10.32 per share, excluding certain items, with revenue increasing by 7.8% to $8.73 billion. This marks the first time the company’s growth has fallen below 10% since 2020. Analysts had predicted earnings of $10.15 per share and sales of $8.72 billion. Notably, Broadcom’s chip business achieved sales of $6.81 billion in the quarter, representing a 9% gain compared to the previous year, while infrastructure software rose by 3% to $1.93 billion.
Tan had previously cautioned analysts and investors that Broadcom’s growth during the pandemic boom would not be sustainable. The previous years’ shortages have now given way to an inventory glut in certain areas, causing customers to postpone new orders. However, the company remains optimistic about maintaining full order books for the remainder of the fiscal year, which concludes in October.
Broadcom’s chips are used in smartphones, home networking, and data centers, making the company a significant indicator of overall tech spending. The semiconductor manufacturer supplies Apple Inc. with semiconductors for iPhone connectivity, encompassing short-range wireless capabilities. The company had previously cautioned that wireless sales would slow in the second quarter. In addition to its core operations, Broadcom, headquartered in San Jose, California, has expanded into enterprise software through acquisitions in the security and mainframe sectors.
However, its planned acquisition of cloud software maker VMware Inc. is currently under regulatory scrutiny and has encountered delays in closing. VMware also reported quarterly results after trading hours on Thursday, revealing that sales and earnings fell short of estimates. Nevertheless, Broadcom remains confident in overcoming regulatory hurdles and expects the VMware deal to be finalized within fiscal year 2023.
Compared to his peers, Tan holds a more cautious outlook on the overall semiconductor industry. He predicts that in the long run, the market’s growth rate will likely align closely with that of the US gross domestic product. Assessing the potential impact of AI on this projection is challenging, as the deployment of AI systems remains limited to a small group of cloud computing companies. Additionally, the rapid expansion of computing systems is hindered by supply-related complexities, with leading-edge components requiring a six-month delivery timeline. As Tan emphasizes, “The ability to ramp-up will be more measured,” suggesting that significant changes will take time to materialize.
Conclusion:
Broadcom’s AI expansion holds promise, with the company expecting significant growth in AI-related chip sales. However, the overall sales slowdown, industrywide tech demand slump, and decelerating growth pose challenges. While Broadcom’s CEO adopts a common tactic to highlight AI gains, the company has yet to match the extraordinary sales increase witnessed by Nvidia. This highlights the competitive landscape and the need for Broadcom to innovate and differentiate itself to capture a larger market share.
The semiconductor market, in general, faces uncertainties, as the deployment of AI systems remains limited and the rapid expansion of computing systems is hindered by supply-related complexities. Despite these challenges, Broadcom’s strong position in networking components and custom chips for data centers positions it well to capitalize on the growing demand for AI services.
