Semiconductor giant Broadcom ( AVGO) , released fiscal second-quarter financial results Thursday, revealing adjusted earnings per share of $10.32 (unadjusted EPS of $8.15) on revenue of $8.733 billion. Both bottom-line prints easily beat Wall Street's expectations, while the top-line number just edged expectations on annual growth of 7.8%.
The adjustments made were made primarily for the amortization of acquired intangible assets and for stock-based compensation expense.
As revenue was growing 7.8%, the cost of that revenue decreased 1.7% to $2,618 billion. This left a gross profit of $6.115B (+12.4%) as gross margin increased to 70% from 67.1%. Total operating expenses increased 3% to $2.107 billion, leaving operating income of $4.008 billion (+18.1%) as operating margin improved from 41.9% to 45.9%. After accounting for interest and taxes, net income landed at $3.481B (+34.4%).
Revenue By Segment
Semiconductor Solutions: generated revenue of $6.80 billion (+9%), comprising 78% of the sales pie.
Infrastructure Software: generated revenue of $1.925 billion (+3%), comprising 22% of the sales pie.
Guidance
Broadcom -- why do I still, after all these years, have to stop myself from referring to this firm as Avago? -- now sees current quarter revenue printing close to $8.85 billion, which is well above the $8.72 billion that Wall Street was looking for. The firm also sees current quarter adjusted earnings before interest, taxes, depreciation, and amortization at approximately 65% of projected revenue which is in line with the quarter just reported.
Fundamentals
For the quarter, Broadcom generated operating cash flow of $4.502 billion. Out of this came purchases of property and equipment of just $122 million worth, leaving free cash flow of $4.38 billion. During the quarter, the firm repurchased $2.806 billion worth of common stock and paid out $1.914 billion in cash dividends to shareholders, meaning that the firm returned 107% of free cash flow to shareholders. That's just a bit aggressive in my opinion. I think we like to keep that ratio below 100% just in case it rains.
Looking at the balance sheet, Broadcom ended the period with a cash position of $11,553 billion and inventories of $1.886 billion, leaving the firm with current assets of $17.871 billion. Current liabilities add up to $7.511 billion, including shorter-term debt of $1.117 billion. This puts the current ratio at a very healthy 2.38 and the firm's quick ratio at a still quite healthy 2.13.
No doubt that AVGO's current situation is as strong as Paul Bunyan's blue ox "Babe." That said, the larger balance sheet gets a bit sloppy. Total assets amount to $71.667 billion. This includes goodwill and other intangibles of $49.048 billion. At 68% of total assets, this is quite discomforting. Total liabilities less equity comes to $49.66 billion. This includes longer-term debt of $38.194 billion. Just my opinion, but a company with absolutely robust free cash flow should probably not run with a debt to cash ratio of considerably more than 3 to 1. AVGO is not asking for my help, but if it did, I would tell the company to buy back fewer shares and pay down some debt.
The CEO's Hopes for AI
Because it is what we all wanted to know, CEO Hock Tan started the call last night discussing prospects regarding generative artificial intelligence.
"I know you all want to hear about how we are benefiting from this strong deployment of generative AI by our customers," said Tan. "Put this in perspective, our business today from this opportunity represents about 15% of our semiconductor business. Having said this, it was only 10% in fiscal '22. And we believe it could be over 25% of semiconductor revenue in fiscal '24."
Wall Street's Take
Since reporting last night, AVGO has seen 10 sell-side analysts -- rated at a minimum of four stars at TipRanks -- opine on the company. Among these analysts, we have nine "Buy" or buy-equivalent ratings and one "Hold" rating. The "hold" rating, which is Joseph Moore of Morgan Stanley, did not set a target price, so we are working with nine targets here.
The average target price across these nine analysts is $886.67 with a high of $950 (Vivek Arya of Bank of America) and a low of $830 (Harsh Kumar of Piper Sandler). Once omitting these two as potential outliers, the average target across the other seven drops to $885.71.
My Take
Performance is excellent. Free cash flow is robust; it just needs to be better managed. Guidance is solid. Sales are growing. AI-related sales are growing faster than sales overall. The stock trades at 19-times forward looking earnings, which is a tad above the market's valuation for the broader S&P 500, but on the light side for anyone benefiting from the progression of the economy into the era of artificial intelligence. In addition, the stock yields 2.33%, which may not sound like a lot, but works out to $18.40 per share per year.
The stock spiked ahead of earnings. A 38.2% Fibonacci retracement of the October through May move, would fill the gap created earlier this week. The stock needs to see $732 to get that done. This level also lines up with a 61.8% retracement of the "May only" move. I'm thinking that while this stock gallops higher that traders can either wait for the stock to come in, or sell equity risk (puts) over time, to get paid to wait. The $730 Aug. 18 puts are still valued at a rough $13.50. A trader could also hedge his or her bets, by purchasing $820 calls expiring a week from today for about $15 and subsidize the payout for the premium by making the above August put sale. This way, if the stock goes higher next week, the trader has something to sell or exercise on his or her hands.
