Investors who missed out on Broadcom’s (NASDAQ: AVGO) first post-stock-split dip have another opportunity. Down 10% following its Q3 results and guidance, it is a knee-jerk move driven by market sentiment and not operational quality, which is superb and sets up the market for a trend-following entry.
Trend-following investors who have waited for Broadcom to return to trend are also rewarded because this move will likely result in a solid entry signal soon.
The primary takeaway from Broadcom’s results is that its semiconductor business is robust, cash flow is robust, and guidance is robust only in alignment with the market’s high expectations. A headwind for share prices today, these results point to accelerating business, continued capital returns, and higher share prices over time.
Broadcom’s VMWare Investment Is Paying Off
Broadcom’s results are solid, with revenue growing by 47.2% compared to last year. The surge in growth is driven by the acquisition of VMWare, which is also driving a wider margin. Revenue outpaced the consensus by a slim 80 basis points, a good showing, except that recent revisions and whisper figures were expecting more strength. The core business is growing by 4%, aided by the boost of VMWare, with services up 5% systemwide and Infrastructure Software up 200%.
GAAP and adjusted earnings were impacted by one-offs related to VMWare’s acquisition and transition but were still solid compared to the consensus. The net result is that adjusted earnings grew to $1.24, lagging the top-line advance by more than 2000 basis points while outperforming the consensus reported by MarketBeat by 250. Guidance is similar, showing strength with an expectation for accelerated YoY growth in Q4 that fell short of the consensus estimate.
The 28 basis point guidance miss is another slim margin made more significant by recent revisions. However, the growth is sufficient to sustain the cash flow and balance sheet health, which is what counts. There were some changes to the balance sheet, including significantly increased liability, offset by the VMWare purchase and the resulting 173% increase in shareholder equity. The critical detail is that VMWare is driving growth and margin, cash flow will improve, the balance sheet is a fortress with total liability at 1.5x equity and less than 1x assets, and the long-term debt ratios are even lower.
Analysts Are Buying the Broadcom Dip
The analyst's response is favorable to shareholders. The first revisions tracked by MarketBeat include reiterated and raised price targets that indicate a range above the current consensus. The consensus implied a nearly 40% upside with the price action near $138, and the fresh targets range from just above the consensus to $210, which is an $80 or nearly 60% gain from the same starting point. Generally speaking, analysts are looking past tepid Q3 performance and guidance because of expected lumpiness in the AI market and the long-term outlook, now enhanced by VMWare.
Shares of VMWare fell 10% after the release and may fall further. However, the market shows some signs of support at the critical levels, which align with the uptrend and support targets in the $135 to $140 range. The market will likely rebound from this level; however, the action may be choppy for the remainder of Q3 and Q4. In the long term, a solid signal should result in a sustained upward movement that takes this market up to retest recent highs and possibly set new ones before the end of the year.
