Is it time to buy a dip in Broadcom stock after sluggish forecast sends shares tumbling?

Broadcom (AVGO 2.79%) Shares are hurt after investors were disappointed by the chipmaker’s fourth-quarter fiscal guidance. Expectations for the quarter were quite high, but the reported results led to a 10% drop in the share price.

Despite the decline, the stock is still up about 62% over the past year as many investors remain excited about the tech stock’s potential. Let’s look at the company’s most recent quarterly results to see if now is a good time to buy the declining stock.

AI and VMware continue to lead

Right now, revenue related to artificial intelligence (AI) chips and networking components as well as VMware are working for Broadcom, but beyond that, the rest of its business segments are struggling. For the third quarter of 2024 (ended Aug. 4), Broadcom reported a 47% year-over-year increase in total revenue to $13.1 billion. When you exclude its VMware segment (acquired last November), revenue rose just 4%.

Semiconductor solutions revenue increased 5% year-over-year to $7.3 billion. In this segment, networking revenue grew 43% to $4 billion, with custom AI accelerator revenue growing 3.5 times. However, the rest of its semiconductor business posted relatively weak numbers.

Wireless revenue rose 1% year-over-year to $1.7 billion, while storage server connectivity revenue fell 25% to $861 million and broadband revenue down 49% to $557 million. The company continues to expect these areas to be weak in fiscal Q4 as well, although it is looking for sequential improvement in its wireless storage and server segments.

Infrastructure software segment revenue rose 200% to $5.8 billion, largely due to VMware adding $3.8 billion to the total. VMware’s contribution increased from $2.1 billion in Q1 and $2.7 billion in Q2 and is approaching the company’s estimated quarterly run rate of $4 billion. Broadcom is in the midst of moving VMware to a subscription licensing model, which it said is progressing well. However, excluding VMware, it appears that Broadcom’s software revenue would have only increased by about 3%.

Turning to profitability metrics, Broadcom’s adjusted earnings per share rose in the quarter from $1.05 to $1.24, adjusting for the previous 10-for-1 stock split. This was ahead of the analyst consensus of 1 .20 USD.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), meanwhile, rose 42% year-over-year to $8.2 billion. The company generated nearly $5 billion in cash flow from operations in the quarter, with free cash flow of $4.8 billion. It ended the period with nearly $10 billion in cash and cash equivalents and $70 billion in debt following its $69 billion acquisition of VMware.

Looking ahead, management expects fiscal Q4 revenue to be around $14 billion (in line with analysts’ consensus estimate). Adjusted EBITDA is being sought to be approximately 64% of revenue, which would equate to approximately $9 billion. For the full year, revenue is now expected to be $51.5 billion, up from previous estimates of about $51 billion.

Broadcom’s management said AI-related revenue would now be about $12 billion for the year, up from an earlier forecast of $11 billion.

Image source: Getty Images.

Is the Broadcom sale an overreaction?

Broadcom’s AI business is performing very well. The company’s networking components, including switches and network interface cards, are an important part of building graphics processing unit (GPU) clusters. Meanwhile, it also produces custom chips (application-specific integrated circuits, or ASICs) for hyperscale customers who want custom silicon to have more control and run AI-specific workloads more efficiently.

However, the rest of Broadcom’s business segments outside of VMware did not perform well. Many of them have significantly affected the company’s overall growth given their decline. These businesses may be more cyclical in nature, but they are in down cycles right now.

AVGO PE Ratio data (1 year ago) by YCharts

After the stock price plunge, Broadcom now trades at a forward price-to-earnings (P/E) ratio below 23. That’s a bit higher than the recent average, but it’s not too expensive, and the company has some potential catalysts. It has previously announced a number of new AI ASIC clients, so this could contribute to significant growth in the coming years. Meanwhile, as AI models need more computing power and GPUs, the networking piece of the GPU cluster that ties everything together should become more important to Broadcom’s benefit.

And with its other businesses more cyclical in nature, they should eventually decline and then start to rise. VMware is also a solid business that has grown nicely.

Overall, there was nothing in the earnings report or its guidance that changed Broadcom’s positive trajectory. With that in mind, I would take advantage of the dip and be a buyer of the stock at current levels.