Broadcom (AVGO) reported its fiscal Q3 results late last week with revenues of $6.78 billion, up 16% year-over-year, surpassing consensus estimates of $6.74 billion. Adjusted earnings came in at $6.96 per share, beating analysts’ expectations of $6.85 per share. The company reported earnings of $5.40 per share in the prior-year period.
In fiscal Q4, AVGO has projected revenues of $7.35 billion while adjusted EBITDA is expected to be 61% of its projected revenue.
Broadcom is a designer, supplier, and developer of semiconductor and infrastructure software solutions that include complex digital and mixed-signal complementary metal oxide semiconductor-based devices. Its infrastructure software segment includes the company’s BizOps and cybersecurity solutions.
I am bullish about Broadcom. (See Broadcom stock chart on TipRanks)
Broadband and Networking Market Looking Up
Now let us look closely at Broadcom’s business through its end markets. The company’s broad end markets include broadband, networking, wireless, storage, and industrial.
When it comes to the networking market, it made up 36% of its semiconductor revenues in Q3 and AVGO expects this growth to be in “low double digits year on year” in Q4.
The company’s management said on its earnings call that it expects networking “to be one of the engines of growth in Q4 and into 2022.”
In Q3, broadband revenues represented 18% of AVGO’s semiconductor revenue and the company expects “double-digit year-on-year revenue growth in broadband” as the company sees service providers like AT&T (T) and British Telecom deploying “in increasing volumes next-generation last-mile fiber connectivity to homes in the U.S. and globally.”
Susquehanna analyst Christopher Rolland is also of the opinion that AVGO’s “FBAR franchise [film bulk acoustic resonator] will significantly outperform the RF [radiofrequency] industry overall, owing to high-frequency band proliferation, we are most compelled by the acquisition of Broadcom ‘Classic,’ whose near-monopolistic position in merchant networking silicon and set-top boxes should drive rising profitability for the company.”
Is AVGO Shipping to Demand?
However, even after exceeding Street estimates, Credit Suisse analyst John Pitzer was anticipating more upside when it comes to the semiconductor business. When the analyst questioned the company’s management on its Q3 earnings call regarding any supply constraints that AVGO could be facing, the answer was surprising.
Hock Tan, President, and CEO of Broadcom said that the company is “shipping to exactly, we believe, to what demand requires. By that, I mean, end-user demand requires.”
Elaborating further, Tan stated that there was a certain panic buying in the semiconductor market where certain end-users or Original Equipment Manufacturers (OEMs) “are just building up buffers — bucket of buffers everywhere.”
Considering this situation, the company was monitoring semiconductor demand from end-users carefully to avoid building “up inventory in the wrong places.”
Acquisition Strategy Driving Economies of Scale
Analyst Rolland also believes that the company’s strategy of acquiring businesses that offer complementary technologies, products, and services will be beneficial for the company over the long term.
According to the analyst, “Broadcom is one of the best integrators in the business, continuing to prove that economies of scale are a viable driver of earnings power for those that can execute in the semiconductor industry.”
Following the results, Rolland raised the price target from $580 to $590 (18.5% upside) and reiterated a Buy on the stock.
Turning to the rest of the Street, analysts are bullish about AVGO, with a Strong Buy consensus rating, based on 19 Buys and 2 Holds.
The average AVGO price target of $571.44 implies 14.8% upside potential from current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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