Our Top Chip Stock Buy September 2024 – More AI Progress At Broadcom (AVGO Stock)

Broadcom's Business Overview Welcome back everybody to Chip Stock Investor. Broadcom just released their Q3 fiscal year 2024 for earnings. Let's double click on the numbers, put some color on the earnings call commentary, and see what zip code Broadcom's growth is going to fall into as they round out the year. I see what you did there. I'm pretty sure a Mean Girls meme is probably going to get inserted right here. Stop trying to make zip code a thing. Okay, well, if you've been listening to some earnings calls, you know what Kasey's talking about right now. But the real reason you're here, Broadcom earnings, and, we're going to explain why we are going to be adding again to our longtime position in Broadcom, after this most recent report. Things are working pretty good as expected, and that's quite okay with us. This episode is sponsored by our friends at public. com. Are you dissatisfied with your savings account? Check out public. com. Public. com has just launched its new high yield cash account, offering an industry leading 5. 1 percent APY. There are no fees, no subscriptions, no minimums or maximums, just 5. 1 interest on your cash. You can transfer or withdraw cash as often as you like, and you get to Up to $5 million in FDIC insurance, grow your cash and an industry leading a 5. 1 percent APY with a high yield cash account at public go to public. com to learn more. Kasey, why don't you give the folks at home a brief overview of what Broadcom actually does within the semiconductor industry? Broadcom fits into a lot of different parts of the semiconductor industry flow. You can see integrated device manufacturer and fabless chip designer, but there at the top, you can also see IP or patents, And Broadcom has had their hands in enterprise software for some time now, however, with the addition of VMware, it's about a 60 40 split. 60 percent of their sales is semiconductors, 40 percent is in software. Now, if you are looking at the press release and wondering why Broadcom swung to a GAAP net loss last quarter, it actually does have to do with the IP and patent portfolio. They transferred a piece of IP and it created a one time tax event. We're not going to get into that now on this episode. We don't think that's a really big deal. GAAP earnings can be kind of a goofy thing. But let's first take a look here at what they had said to expect three months ago. They were guiding on a full fiscal year expectation up until Q3. So you're going to see a difference on the right hand column when we switch to the updated slide. But overall CEO, Hock Tan and company had said to expect about a mid to high single digit percentage increase for the semiconductor segment. And on the infrastructure and enterprise software segment, they had said that software revenue was going to reach $20 billion dollars for full fiscal year 2024. Q3 Earnings Breakdown Okay, now let's look at this most recent quarter. Total semiconductor sales ended up being $7. 2 billion. Infrastructure software ended up being $5. 8 billion, 3. 8 billion of that came from VMware. Now for Q4 fiscal 2024, that will be the three months that end in October. Broadcom said quarterly revenue for semiconductors should be $8 billion up 9 percent year over year. In a moment, we'll get into why we're seeing some acceleration and growth. And then $6 billion for infrastructure software, up 300 percent year over year. If you exclude VMware from the equation, that's just 2 percent year over year growth. However, VMware, you can see the sequential increase, in revenue being driven by VMware. Lots of talk out there about Broadcom mixing things up with the VMware software segment that they've acquired. A lot of partners not happy, some customers not happy. There's a lot of noise here, but overall the revenue is still speaking for itself and Broadcom making some great progress, at least speaking financially from that side of the equation, making some good progress with this acquisition. Broadcom vs. Marvell: A Comparison Before we talk about some of these segments a little bit deeper, why don't we compare what happened with Broadcom's quarterly earnings versus what happened with Marvell's quarterly earnings . Marvell, of course, is a much smaller company and they do not have this infrastructure software segment of the business, but Marvell calls Broadcom its biggest competitor for good reason. We have covered this in past videos as to why they compete with each other. Broadcom and Marvell both providing the custom chip design work for some of the big tech companies, the big hyperscalers like Amazon AWS, Google with its TPUs, Meta doing some work on this front, Microsoft. You name it, all the big tech companies are using either IP from Broadcom or Marvell at this point to make these custom accelerators and networking chips for their own back end work, behind the scenes data center compute work. The reason why we're covering this Kasey is because of course we revealed earlier this year, we were going to be exiting our long time position in Marvell and reallocating at least half of those proceeds to Broadcom. And that's exactly what we've been doing. We have more coverage on Marvell over on our Discord channel. Nick created a thread over there analyzing the most recent earnings as well as our decision to exit Marvell. Obviously they had a great quarter driven by data center sales. You can see up 92 percent year over year. However, we are still happy with our decision to exit Marvell and allocate more of our funds to Broadcom. If you would like to have access to our Discord community, make sure you check out our Semiconductor Insider membership link to that in our description. Broadcom's Market Segments Let's talk about some of these specific segments, the end market segments for Broadcom. Networking, wireless, storage, connectivity, broadband and industrial. It's been a while since we explained exactly which each of these segments do. And then we'll round this out finally, with discussion of infrastructure software and some recent announcements that were made from VMware. They had their big annual event in Las Vegas at the end of August. So first up is the networking or high performance connectivity segment. This is where you hear about all of the AI accelerator work happening, especially for the big data center hyperscalers, big tech. Specifically, this is where Broadcom provides the IP for those custom chip designs like AWS custom chips, Gravitron, Tranium, Inferentia, and so forth. As well as Google's TPUs and Google is actually Broadcom's oldest customer. They've been working with Google since at least 2015 on those TPUs. Next up is server and storage connectivity. This is for on premises and cloud. This is non AI, more traditional enterprise computing network chips. These chips move data out of memory or storage to the compute section of the data center and vice versa. One big hyperscaler customer makes up a big chunk of revenue in this segment. And next up is wireless mobile device connectivity. Probably see the trend here. Networking chips doesn't matter what level, networking we're talking about it could be the big data center scale or down to this very small device level. Broadcom does an exceptional job. The big customer in this segment is Apple and Broadcom revealed in its earnings call, they actually expect about a 20 percent quarter over quarter increase in sales in this segment, thanks to their North America customer. That is Apple, that's who they're talking about. And we have the new iPhone releases, that are coming. It's going to be the first Apple products with Apple intelligence, AI, super clever, Apple. Good job with naming that. And Broadcom is a top supplier of connectivity chips for those iPhones and Apple products as well as some other customers as well mixed in there. Broadband this is connected devices, customer premises, and service providers. This segment for Broadcom is actually quite small, and there has been a significant pause from Internet service providers in rollout of 5G and Internet infrastructure in general. They do expect a recovery in demand for these broadband end to end solutions in fiscal year 2025. And final segment. At least on the semiconductor side is the industrial segment. Automation, renewable and automotive. No surprises here. We've made a ton of videos about the downturn, especially in automotive and power chips. Broadcom has been hit by that severe downturn as well. What was once a chip shortage for automakers and industrial chip users during the pandemic through 2022 and first half of 2023 has turned on its head. We now have an excess of supply in inventory of chips for automakers and for industrial equipment, and it's just taking time for those inventory levels to bottom out. But the good news is here, Broadcom has indicated along with every other chip maker in this segment, like On Semi, for example, another one of our favorites in the auto and industrial chip segment, the bottom is in, and they are expecting sequential recovery going forward. VMware Acquisition and Software Segment Thank you. Okay, last but certainly not least, is the software portion of the business for Broadcom. Broadcom has had a software portion of the business for quite a while, but that addition of VMware has made it a much bigger portion of the business. As Kasey said earlier, Broadcom is now this really interesting, unique, hybrid business. 60 percent semiconductor designer, 40 percent enterprise infrastructure, software developer and provider. They have all sorts of stuff in here. They've patched this together with multiple acquisitions over the years. You get some cybersecurity, you get some infrastructure for payments providers, like Visa and MasterCard and other such digital payments networks. And of course, now, with the addition of VMware, Broadcom is providing this end to end suite of data center management software. And that could be, if you're a hyperscaler that provides a cloud solution, a public cloud solution for companies to rent computing and access that via internet connection, or if you're a private enterprise, building your own private network with your data centers. Vmware is obviously a absolutely foundational tool for doing that. VMware had an annual conference recently in Las Vegas, VMware Explore 2024. Nick, maybe you can tell us a little bit about some of the news coming out of that conference. Yeah, a lot of people suddenly becoming very aware, VMware plus Broadcom really becoming some sort of big tech competitor, an alternate offering to what you might want to go out and purchase from Amazon AWS or Microsoft Azure or Google Cloud. For a lot of businesses, you may not want to move your IT all completely to the public cloud. Especially if you're a large business, you're going to have to deal with regulatory concerns legal concerns, privacy, how to secure all of your operations properly. Public cloud doesn't make sense for every workload. And this was actually the strategy all along. Hock Tan always wanted to add VMware so that there was a new competitor for those big tech hyperscalers. This really jives with what NVIDIA is working on as well. This partnership between Broadcom and NVIDIA. I don't think a lot of investors realize that these are not exactly direct competitors. Broadcom and NVIDIA really in many ways are complimentary to each other. This VMware private AI foundation was announced last summer, and this is kind of an extension of VMware's cloud foundation that they had established already, that, gives customers an out of the box, ready to use tool set for setting up their data center and cloud journey. Whether that's going to be private, public or some hybrid and somewhere in between. Doing the same thing now, with private A I. Obviously you have mountains of data. If you're a large organization, you want to keep that private data is the new oil chips are the infrastructure that run that data and you don't want any of that data leaking out into public consciousness, public awareness, especially not to your competitors. So private AI, again, just another software based tool set for customers to just grab and use ready to go right out of the box to start that generative AI journey. Hock Tan has been talking a lot about this as of late. Infrastructure software, and especially that VMware segment expected to propel not just revenue growth, but profitable growth through fiscal 2025. As was discussed on the earnings call, and as you can see in the numbers that we'll show you again for this most recent quarter, broadcom has seen a leveling out of their end markets, such as consumer and for cloud and enterprise, excluding AI. AI, of course, is in max growth mode and Broadcom, Marvell, are both still seeing a lot of growth and revenue coming from that sector. However, Consumer, which includes PCs, smartphones and cloud and enterprise in markets are at just at the beginning of a new growth cycle. These segments being at the start of a new growth cycle will definitely bode well for Broadcom. On the right of the chart, you can see a few rows that have been in red storage, connectivity, broadband, and industrial. As these segments return to growth, consumer, cloud and enterprise, and even auto and industrial, this will help improve these numbers over the next 12 months for Broadcom. Yeah, really fantastic news. It won't just be the AI business, the accelerator business, that's under networking the over 40 percent expected growth, once again, in the final quarter of the fiscal year. We should see all of these segments at the very least on a sequential basis, start to kick back into high growth mode over the course of fiscal 2025. When you pair that with VMware driving profitable growth in the 40 percent of the overall Broadcom business, now, you get the 60 percent semiconductor business also accelerating there. You can see 6 percent year over year growth in Q3, expected 9 percent year over year growth in Q4 that trend should continue in fiscal 2025. Valuation and Investment Strategy Let's talk about valuation for Broadcom because at the beginning of the video, we mentioned that we're going to be adding. Indeed. I think we're both in agreement on this. We are also adding a starter position and a small cap stock, TransMedics. Kasey's done a lot of work researching that one. That's going to be the other top ad that we make for September. But for Broadcom specifically, $ 780 billion enterprise value. That's market cap plus debt minus cash on balance. They have lots of debt net of cash in large part because of VMware, you can see the exponential rise the last few years. There's a couple of reasons for this rapid rise in enterprise value. The first, multiple acquisitions culminating in VMware, most recently mega acquisition, they're driving significant growth and profitability. And then in addition to that, of course, the AI, really read accelerated computing trend, picking up steam last year. I don't think we're going to say this is an expensive stock at this point. We have had a little bit of a pullback and the valuation on a forward looking basis actually looks fairly reasonable. These numbers are based on Wall Street estimates on a forward looking basis. Forward price to earnings 27 to 28 times and forward price to free cashflow around 26 X. it Still doesn't seem expensive even after Broadcoms awesome run this last year. Yeah, and we're certainly not calling it a cheap stock either because the market has definitely caught on to what Broadcom is up to and it and NVIDIA have really emerged as like the champions of this new bull market that started last year in 2023, so not a cheap stock. However, our model anticipates free cashflow, perhaps accelerating a bit faster than what Wall Street expectations are. That's just our estimate. I believe it's maybe closer to 20 times next year's free cash flow. At any rate, I think we're happy to add to this long time position at this point on the expectation that Broadcom's semiconductor plus infrastructure software combo does indeed provide some good competition to big tech. And gives lots of enterprise customers a new option to work with as they continue on their cloud journey. And now also feathered into that, this accelerated computing and generative AI journey, that's really just beginning. So we like Broadcom still for the longterm. Conclusion and Final Thoughts Broadcom is definitely not perfect. There is some risks involved with this business. CEO Hock Tan has a very unique strategy. It's almost like a VC firm, private equity firm in his acquisition strategy. And that brings with it a lot of debt on the balance sheet. These are a couple of things that we acknowledge our risks to Broadcom. However, for us, it's a manageable risk. Yeah. No business is perfect. If you think your investment is perfect, you probably need to do some more digging. There's always skeletons in the closet. All right. Thanks for watching this episode on Broadcom. Make sure you sub to the channel and check check out our Semiconductor Insider membership, just five bucks a month. And also thank you to our sponsor public. com for helping us out with this video. Link to them in the description below.