Broadcom Earnings Preview: AI Revenue May Nearly Double, But Strong Performance May Not Save Stock Price

Broadcom will announce its earnings report after the market closes on Wednesday. Wall Street expects the company to report strong performance, but media reports suggest that based on recent trading trends, even if the company exceeds the already high market expectations, it may not be enough to reverse the stock price's downward trend over the past few months.

Broadcom's stock price has fallen 24% from its historical high in December last year, significantly underperforming the S&P 500 index. This round of selling is part of a broader retreat by investors from large tech stocks. The market is concerned about whether the hundreds of billions of dollars invested by companies to develop artificial intelligence capabilities can be sustained in the long term.

Broadcom is currently the seventh largest company in the S&P 500 by market capitalization, with a market value of approximately $1.5 trillion. The company is a chip partner for AI giants like Alphabet, thus directly benefiting from this wave of AI investment.

AI Performance May Double, Focus on Order Backlog Amount

Analysts believe that while these concerns may materialize in the future, for now, Broadcom's fundamentals still appear robust.

Analysts expect the company's adjusted earnings per share for the first quarter of the fiscal year to grow 27% year-over-year to $2.03; revenue is expected to increase by 29% year-over-year to approximately $19.3 billion. Of this, AI-related sales are expected to nearly double, reaching about $8.2 billion. If the company provides a positive outlook, Wall Street would not be surprised.

Paul Meeks, head of technology research at Freedom Capital Markets, stated:

“Broadcom will definitely release a lot of positive news. But the question is, it may not matter.”

He cited Nvidia's stock performance after last week's earnings report as an example. Nvidia's reported performance exceeded Wall Street's expectations, and due to strong product demand and plans by hyperscale cloud providers to increase capital expenditures, the company raised its earnings guidance. However, in the two trading days following the earnings report, Nvidia's stock still fell 9.4%, marking its worst two-day performance since April.

After Broadcom announced its last earnings report in December, its stock also suffered a sharp decline, dropping more than 11% on the day, marking the largest single-day drop in nearly a year. The issue at that time was that the company disclosed a backlog of AI product orders amounting to $73 billion for the next six quarters, which was below market expectations.

Therefore, investors will naturally pay attention to whether the backlog amount for AI products is updated this time. Additionally, the market will also focus on the progress of the tensor processing unit (TPU) chips that Broadcom is developing for Google. Google's orders are expected to start increasing significantly in the second half of this year. Meanwhile, Broadcom's collaboration with OpenAI is also expected to drive business growth and continue until 2027.

Analyst: Broadcom Has a "Deep Moat"

Shaon Baqui, a senior technology research analyst at Janus Henderson who holds Broadcom stock, stated:

“For Broadcom, it is very important to emphasize their real strength in designing large custom chips.”

“They have developed seven generations of TPU chips for Google and have a very mature track record of collaboration. The ability to continuously deliver products from generation to generation is crucial, especially when competing with Nvidia.” “Manufacturing such giant AI accelerator chips is very difficult. I think Broadcom needs to emphasize that they actually have quite a deep moat in this field.”

Another issue in Broadcom's last earnings report was the profit margin. At that time, the company's CEO Hock Tan stated that AI-related sales were dragging down the profit margin. The market expects Broadcom's adjusted gross margin for the first quarter of this fiscal year to be around 77%, down from 78% in the previous quarter and also lower than 79% a year ago.

Analysts may also raise questions about the company's software business. This segment is expected to account for 42% of Broadcom's total revenue by 2025. In the past, this business was seen as an important sector to balance the cyclical fluctuations of the semiconductor business. However, the recent overall decline in software stocks has also put pressure on Broadcom's stock price.

Meeks from Freedom Capital stated:

“It will be interesting to see how they disclose the situation of this business segment, including their guidance for the future.”

“During the Q&A session of the earnings call, they will definitely be directly asked about the positioning of the software business in the company's overall strategy. In the past, this business was a good source of risk diversification, but in the AI era, it is now seen by the market as a heavy burden.”

Stock Price Has Become Cheap, But May Not Rebound

One result of the recent decline in stock prices is that Broadcom's valuation has become cheaper. However, even so, the stock price may still have further downside potential. Currently, Broadcom's expected price-to-earnings ratio is about 27 times, which, although lower than the peak of 42 times in December last year, is still significantly higher than its average level of 22 times over the past five years and also higher than its competitor Nvidia's valuation of about 21 times.

Options traders expect Broadcom's stock price to experience significant volatility after the earnings report is released. Current market pricing indicates that the stock price may fluctuate by about 7% in either direction after the earnings report.

Kunjan Sobhani, an analyst at Bloomberg Industry Research, stated that three things could drive the stock price up: the announcement of new hyperscale cloud customers with significant revenue contributions, a substantial increase in AI order backlogs during the same time period, or Hock Tan making positive comments about collaborations with OpenAI and Anthropic.

However, considering the recent pessimistic market reaction to tech companies' earnings reports, even if these positive factors occur, Broadcom's stock price may not be able to rebound significantly. Sobhani said:

“It seems that the better the company's performance, the worse the stock price performs. At least that's the case this earnings season.”