Broadcom Stock: 3 Reasons to Buy, 3 Reasons to Sell

Broadcomhis (AVGO 2.79%) Shares fell 10 percent on Sept. 6 after the chipmaker and infrastructure software provider released its latest earnings report. For the third quarter of fiscal 2024, which ended Aug. 4, its revenue rose 47 percent year over year to $13.1 billion and beat analysts’ estimates by $110 million. Its adjusted earnings per share (EPS) rose 18% to $1.24 and also beat the consensus forecast by $0.02.

Those headline numbers were impressive, but tepid growth in its semiconductor business and softer-than-expected guidance drove the bulls away. So, should investors consider the post-earnings pullback a buying opportunity? Let’s break down the key numbers and discuss the top three reasons to buy or sell Broadcom stock.

Image source: Getty Images.

Key numbers

Broadcom, known as Avago until it acquired the original Broadcom in 2016, previously generated most of its revenue by selling chips for the mobile, data center, networking, wireless, storage and industrial chip markets. But over the past eight years, the “new” Broadcom has expanded into the infrastructure software market by acquiring CA Technologies in 2018, enterprise security division Symantec in 2019 and cloud software giant VMware last November.

In the third quarter, Broadcom generated 56% of its revenue from its semiconductor solutions unit and the remaining 44% from its infrastructure software unit. Its infrastructure business has grown rapidly over the past three quarters, but that growth has been driven primarily by its acquisition of VMware. The semiconductor business, which did not benefit from any large acquisitions, grew at a much slower pace.

Data source: Broadcom. YOY = Year Over Year.

The three reasons to buy Broadcom

Bulls think Broadcom is still a buy because its artificial intelligence (AI) chip sales are growing, its non-AI chip business is stabilizing, and it actually raised its full-year outlook.

Broadcom’s sales of custom networking, optical and acceleration chips continue to grow as data centers modernize their infrastructure to support data-hungry AI applications. It expects to generate $12 billion in AI chip revenue in fiscal 2024, up from about $4 billion in fiscal 2023. That would account for nearly a quarter of its full-year revenue.

Broadcom’s sales of non-AI chips have slowed over the past year as its other markets faced macro headwinds. But in the latest conference call, CEO Hock Tan said it had “bottomed out in our non-AI markets” and was “expecting a rebound in Q4”.

In its infrastructure software division, Broadcom said VMware bookings continue to accelerate even as it transforms and streamlines the business to cut costs. VMware is expected to beat its original target of generating $8.5 billion in annual adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) about a year ahead of schedule.

Broadcom also raised its full-year revenue guidance from $51 billion to $51.5 billion (up 44% from fiscal 2023) and raised its EBITDA margin outlook adjusted from 61% to 61.5%. That would be lower than the adjusted EBITDA margin of 64.8% in fiscal 2023, but that decline isn’t too surprising since it still integrates VMware’s lower-margin business.

The three reasons to sell Broadcom

Bears still don’t like Broadcom because its growth will slow after it fully exits the VMware takeover, its debt level is high, and insiders are still net sellers.

For fiscal 2025, analysts expect Broadcom’s revenue to grow just 5%. It ended the third quarter with a debt-to-equity ratio of 1.6, and that leverage could continue to grow if it acquires more companies to expand its semiconductor and software businesses. It could also accidentally “damage” those businesses by biting off more than it can chew.

Broadcom shares still look reasonably valued at 23 times forward earnings, but insiders have sold 44% more shares than they’ve bought over the past 12 months. They have also not bought any shares in the last three months. The cooling sentiment inside suggests its upside potential could be limited as investors turn away from hot AI stocks.

Which argument makes more sense?

Broadcom is a bold and ambitious company that isn’t afraid to take on a lot more debt to expand into growth markets. That aggressive strategy has paid off so far, and its successful evolution into a diversified chip and software company makes it a good long-term play for the secular expansion of the cloud and AI markets.

Broadcom’s most recent earnings report wasn’t flawless, but its strengths clearly outweigh its weaknesses. Investors who buy stocks after the trailing earnings fade and the short-term noise fades could be well rewarded over the next few years.