Story Stocks^®

The appetite for AI remains ravenous, as evidenced by Broadcom's (AVGO +13%) impressive beat-and-raise in Q2 (Apr) despite enduring ongoing cyclical weaknesses in enterprises and telecoms. The semiconductor and infrastructure software giant's double-digit organic revenue growth in the quarter was almost entirely driven by AI, which exploded by 280% yr/yr. The unwavering AI demand is dwarfing cracks across AVGO's primary end markets by such a significant magnitude that AVGO was confident in raising its FY24 (Oct) revenue outlook by $1.0 bln to around $51.0 bln. AVGO also announced a ten-for-one stock split, adding to today's enthusiastic response as it makes shares appear cheaper and brings real advantages to options traders.

• VMware, a virtualization software and cloud computing platform, has also fueled AVGO's robust yr/yr revenue growth for two consecutive quarters, contributing roughly 31 pts to the company's consolidated 43.0% pop to $12.49 bln in Q2. The other 12.0 pts emanated from AI, which comprised a quarter of AVGO's total sales, up noticeably from 19% in Q1 (Jan), underscoring how much AI demand has snowballed.
  • Additionally, on VMware, AVGO mentioned that its integration of the company is progressing well as it transitions all VMware products to a subscription licensing model. Management anticipates VMware revs to accelerate towards its previously outlined $4.0 bln per quarter run rate, pushing operating margins toward those in AVGO's overall Infrastructure Software segment.
• Proliferating AI spending showed up in AVGO's Semiconductors segment, specifically its networking end market, which enjoyed a 44% leap in revenue yr/yr. AVGO mentioned that its hyperscale customers are increasing their investments to scale up the performance of AI accelerators. CEO Hock Tan stated that strength in AI should continue, leading to the company's raised networking revenue growth projection to +40% yr/yr in FY24, up 5 pts from its previous forecast.
• Outside of AI and VMware, less impressive developments unfolded. In wireless, comprised entirely of sales to Apple (AAPL), revs grew just 2% yr/yr while slipping by 19% sequentially, reflecting typical seasonality. Still, for FY24, AVGO reiterated its flat growth outlook.
• Meanwhile, server storage connectivity and broadband encountered a 27% and 39% drop in sales yr/yr, respectively, in Q2. In server, AVGO is optimistic that Q2 marked a bottom, expecting a modest recovery during the back half of the year. Similarly, in broadband, where demand remains weak due to a continued pause in telco spending, AVGO forecasts a bottom to materialize sometime during 2H24 with a recovery in 2025.

With shares now up nearly +60% YTD following a 100% surge in 2023, AVGO is not without its risks, particularly from NVIDIA (NVDA), which is launching its latest Blackwell chip this year, possibly drying up demand for AVGO's custom chips. NVDA also announced the upcoming launch of their Spectrum-X Ethernet switch, potentially stepping on AVGO's toes as well. However, Mr. Tan was not concerned about NVDA, mentioning that it does not compete with this company. Still, he did note that NVDA's Ethernet offering could bring about some competition in this arena.

Nevertheless, AVGO's Q2 report showcases that AI continues to prop up AVGO meaningfully, offsetting cyclical weaknesses from troubling end-market demand across handsets and telecoms. Unless the appetite for AI among big tech starts to crumble, AVGO remains in good shape.