"AI sells shovels people" Broadcom (AVGO.US) revenue exceeded expectations by 34%, AI revenue engine is accelerating firepower"

One of the biggest winners of the global AI trend, Broadcom (AVGO.US), announced its fiscal first quarter earnings for the 2024 fiscal year as of February 4th on the morning of March 8th Beijing time. Broadcom is a key supplier of RF chips for Apple Inc. (AAPL.US) smartphones and Ethernet switch chips for other major tech companies. However, the semiconductor revenue reported by the company fell short of analysts' expectations. Nevertheless, Broadcom stated that the global trend of enterprises investing in artificial intelligence is helping drive the expansion of demand for the company's chip products, and it is expected that the growth rate driven by the trend of enterprise AI expenditure will accelerate in the 2024 fiscal year. Broadcom also expects that the demand for artificial intelligence will help offset weakness in other areas. Overall, the financial report data shows that the "prosperity of spending on artificial intelligence by global enterprises" has stimulated strong demand for Broadcom's Ethernet switch chips, but the company is facing challenges in dealing with slowing sales of chips in certain areas such as smartphones and telecommunications infrastructure, which is putting immense pressure on its semiconductor business. The latest performance data from the company shows that the semiconductor business division revenue for the first quarter was approximately $7.39 billion, a 4% increase year-on-year indicating a noticeable recovery in demand for Broadcom chips. However, this number was lower than the general expectation of $7.7 billion from Wall Street analysts, which led to Broadcom's stock price dropping more than 8% after the announcement of its performance, but the decline was significantly reduced later on. In terms of overall revenue, Broadcom's total revenue for Q1 was approximately $11.96 billion, a 34% increase compared to last year, surpassing the general expectation of $11.73 billion by analysts. The cash flow generated from operating activities in the first quarter was approximately $4.815 billion, showing an increase compared to $4.036 billion in the same period last year. Adjusted EBITDA under NON-GAAP guidelines was approximately $7.156 billion, compared to $5.678 billion in the same period last year. Broadcom's quarterly common stock dividend remains high at $5.25 per share. Recently, the board of directors of the semiconductor giant increased the dividend by 14% to $5.25 per share, which reaffirms shareholders' confidence to continue holding and continuously attracts new investors. Analysts generally believe that Broadcom increased the dividend primarily to reflect the expected growth in cash flow associated with the acquisition of VMware and to stabilize shareholder confidence with the increased dividend, making shareholders believe that the acquisition of VMware will not bring additional cash pressure to Broadcom. Since the company started paying dividends over a decade ago, the dividend has increased at least once every year. In terms of performance outlook data, Broadcom expects total revenue for the 2024 fiscal year ending in October to reach $50 billion, an expected increase of about 40% compared to the 2023 fiscal year, which is in line with the general expectation of analysts. However, Broadcom has temporarily suspended the release of quarterly forecast data as the company is currently integrating and restructuring related to the recently acquired virtualization and cloud services provider VMware. Excluding some special items, under the NON-GAAP guidelines, Broadcom's profit for the first quarter was $10.99 per share. Analysts had previously estimated the earnings per share for the quarter ending on February 4th to be $10.42. The demand for software helped to offset the lower-than-expected semiconductor business revenue. Financial report data shows that Broadcom's infrastructure software business revenue for the first quarter of the 2024 fiscal year was approximately $4.57 billion, exceeding the general analyst expectation of $4.33 billion. The global AI spending trend will continue to be a key driver of Broadcom's performance in the "AI chip vendor" sector The latest performance of Broadcom seems to indicate that the global enterprise spending spree on AI computing power may not significantly boost Broadcom chip sales as expected on Wall Street. However, Broadcom CEO Hock Tan has pledged that the AI sector will become an important part of Broadcom's total revenue for the current fiscal year. Meanwhile, sales of Broadcom's infrastructure software seem to be stronger than analysts' expectations. CEO Hock Tan stated in a conference call with analysts that the scale of enterprise spending on hardware and software related to artificial intelligence will drive accelerated growth in the company's performance this year. The Broadcom management currently expects that by the end of the 2024 fiscal year, the revenue generated by AI-related spending brought on by the AI spending spree will account for about 35% of its semiconductor business revenue, far higher than Broadcom's previous forecast of 25%. Nvidia (NVDA.US), the AI chip leader dubbed as the "strongest AI chip vendor," has experienced an incredibly rapid increase in performance over the past year, prompting investors to look for other "scoop" type companies in the AI hardware sector that are prepared to unexpectedly profit in the field of artificial intelligence. Broadcom does not produce Nvidia-style AI GPUslarge language models that provide core driving force for AI applications such as ChatGPT for training. But Broadcom provides crucial Ethernet switch chips for enterprises worldwide and collaborates with tech giants such as Google and Microsoft to design and develop customized AI ASIC chips, making some of Broadcom's hardware products an essential part of large data centers for handling massive AI workloads. Broadcom's Ethernet switch chips are mainly used in data centers and server cluster devices to efficiently and quickly process and transmit data streams. Broadcom's chips are indispensable for building AI hardware infrastructure as they ensure high-speed data transfer between GPU processors, storage systems, and networks, which is crucial for generative AIs like ChatGPT, especially for applications that require processing large amounts of data input and real-time processing capabilities, such as Dall-E for text-to-image and Sora for video-to-text large models. Broadcom is a leader in RF chips for smartphones like Apple's and in the wired and wireless communication fields. For AI underlying hardware, the demand for Broadcom's Ethernet switch chips and ASIC chips based on Broadcom's data transmission technology is incredibly strong, with rumors that tech companies like Google and Microsoft often specifically request to purchase Broadcom products. The strong demand for Ethernet switch chips is clearly visible in Broadcom's consistently strong revenue data exceeding expectations in the 2023 fiscal year. BroadcomNow, as well as in the future, AI will be one of the biggest beneficiaries of the current trend.Despite Broadcom's semiconductor business revenue falling short of market expectations, Broadcom CEO Hock Tan stated that there is strong demand for its network chip products in large data centers based on artificial intelligence, and large cloud computing service providers such as Google have strong demand for its customized AI ASIC chips. It is reported that in November 2023, Broadcom launched the industry's first "NetGNT" new on-chip neural network inference engine, marking its advanced progress in providing innovative solutions for data centers dominated by AI and machine learning (ML). The company's Ethernet switch software based on "NetGNT" and equipped with the Trident 5-X12 chip is programmable and instantly upgradeable, providing not only 16.0 Terabits/second of bandwidth but also supporting 800G ports, allowing it to connect directly to the latest Tomahawk 5, a leading technology used as a backbone/structure in the latest computing and AI/ML data centers. The design of Trident 5-X12 aims to support next-generation CPU and GPU accelerated servers, while providing higher network transfer efficiency and performance. The Trident series of chips are known for their high performance, high density, and energy efficiency, and are one of the key technologies for building modern large data center network infrastructure. As a member of the series, Trident 5-X12 continues this tradition by providing advanced network bandwidth, low power operation, and high scalability to meet the needs of next-generation data center networks, including support for AI and machine learning workloads. The high performance and high port density of Trident 5-X12 make it particularly suitable for high-speed network requirements within modern data centers. In addition, Broadcom plays an important role in the design and manufacturing of AI ASIC (AI ASIC) chips, which require high-performance communication and data transfer chips to support high-speed data processing and transmission. Broadcom's network chip technology provides support in this area, for example, helping Google's multiple TPU chips achieve efficient data processing capabilities. Broadcom provides key semiconductor components to cloud computing giants like Google, such as network interface cards (NICs) and switch chips, which are essential for building fast and efficient data centers. According to a report from the well-known research institution IDC, it is expected that global artificial intelligence (AI) spending, covering software, hardware, and other services for AI-centric systems, will reach approximately $154 billion in 2023, a 26.9% increase from total spending in 2022. IDC expects a compound annual growth rate (CAGR) of 27.0% for the period 2022-2026, with total spending on AI-centric systems reaching over $300 billion in 2026, including software, hardware, and other services. Since 2023, the global AI boom has boosted Broadcom's stock price by 104%, and this AI boom continues to ferment under the strong performance of chip companies like Nvidia and TSMC this year. Broadcom's stock price has risen by about 26%, ranking ninth in the market value ranking of US stocks, but after the release of the financial results, the stock fell by over 8% in after-hours trading as Broadcom's semiconductor business revenue fell short of expectations, and its 2024 financial outlook only met expectations without the significant outperformance seen with Nvidia. Over the years, Broadcom has continuously expanded its product portfolio from semiconductors to enterprise software solutions and other software services, with this strategy being complemented by the recent completion of the VMware acquisition. Hock Tan stated that the integration work for this large transaction will take about a year and cost approximately $1 billion, including costs related to layoffs. As Broadcom continues to grow into a diversified technology company after acquiring VMware, and the global trend of enterprises embracing AI continues, Wall Street analysts generally believe that the company seems to be able to benefit from the surge in demand for underlying hardware for AI, as well as the high demand for enterprise software solutions. Recently, the well-known investment firm Susquehanna raised Broadcom's target price from $1400 to $1550 (as of Thursday's closing price of $1407). Analysts generally expect rapid growth in the generative AI market in the coming years to accelerate the sales of Broadcom's Ethernet switch chips. At the same time, the long-term growth trends in network security and cloud services will also increase the growth prospects of its infrastructure business with VMware. Analysts expect VMware to become a core business for Broadcom, where Broadcom will create private and hybrid cloud environments for large global enterprises and divest non-core assets. In terms of cloud services, VMware's cloud services mainly focus on virtualization and software-defined data center solutions, with its main product being VMware vSphere for building and managing virtualized infrastructure. Before Broadcom announced its latest financial results, several Wall Street investment firms significantly raised their 12-month target stock prices for the company. Rosenblatt raised its target price for Broadcom from $1160 to $1500; Cantor Fitzgerald raised its target price from $1300 to $1600; Mizuho raised Broadcom's target price from $1450 to $1550.