Broadcom (NASDAQ:AVGO) Beats Q3 Sales Target, Provides Encouraging Quarterly Guidance

Jabin Bastian /
2022/09/01 4:34 pm EDT

Fabless chip and software maker Broadcom (NASDAQ:AVGO) reported above analyst expectations in Q3 FY2022 quarter, with revenue up 24.8% year on year to $8.46 billion. Guidance for next quarter's revenue was $8.9 billion at the midpoint, which is 2.08% above the analyst consensus. Broadcom made a GAAP profit of $2.99 billion, improving on its profit of $1.87 billion, in the same quarter last year.

Is now the time to buy Broadcom? Access our full analysis of the earnings results here, it's free.

Broadcom (AVGO) Q3 FY2022 Highlights:

  • Revenue: $8.46 billion vs analyst estimates of $8.4 billion (small beat)
  • EPS (non-GAAP): $9.73 vs analyst estimates of $9.55 (1.91% beat)
  • Revenue guidance for Q4 2022 is $8.9 billion at the midpoint, above analyst estimates of $8.71 billion
  • Free cash flow of $4.3 billion, roughly flat from previous quarter
  • Inventory Days Outstanding: 81, up from 78 previous quarter
  • Gross Margin (GAAP): 75.4%, up from 74.4% same quarter last year

"Broadcom's record third quarter results were driven by robust demand across cloud, service providers, and enterprise," said Hock Tan, President and CEO of Broadcom

Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ:AVGO) is a semiconductor conglomerate that spans wireless, networking, data storage, and industrial end markets along with an infrastructure software business focused on mainframes and cybersecurity.

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

Broadcom's revenue growth over the last three years has been unremarkable, averaging 12.6% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $6.77 billion to $8.46 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Broadcom Total Revenue

This was a decent quarter for Broadcom as revenues grew 24.8%, topping analyst estimates by 0.68%.

Broadcom believes the growth is set to continue, and is guiding for revenue to grow 20.1% YoY next quarter, and Wall St analysts are estimating growth 9.41% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Broadcom Inventory Days Outstanding

This quarter, Broadcom’s inventory days came in at 81, 19 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Broadcom's Q3 Results

Sporting a market capitalization of $201 billion, more than $9.97 billion in cash and with positive free cash flow over the last twelve months, we're confident that Broadcom has the resources it needs to pursue a high growth business strategy.

Broadcom's revenue guidance for the next quarter looks quite a bit better than what the analysts were expecting. And we were also glad to see that earnings outperformed analysts' expectations. On the other hand, there was an increase in inventory levels. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 2.63% on the results and currently trades at $505.1 per share.

Should you invest in Broadcom right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.