Fabless chip and software maker Broadcom (NASDAQ:AVGO) reported Q2 FY2022 results topping analyst expectations, with revenue up 22.5% year on year to $8.1 billion. Guidance for next quarter's revenue was $8.4 billion at the midpoint, 5.37% above the average of analyst estimates. Broadcom made a GAAP profit of $2.59 billion, improving on its profit of $1.49 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) Q2 FY2022 Highlights:
- Revenue: $8.1 billion (2.46% beat)
- EPS (non-GAAP): $9.07 vs analyst estimates of $8.72 (4.06% beat)
- Revenue guidance for Q3 2022 is $8.4 billion at the midpoint, above analyst estimates of $7.97 billion
- Free cash flow of $4.15 billion, up 22.8% from previous quarter
- Inventory Days Outstanding: 78, up from 72 previous quarter
- Gross Margin (GAAP): 75.8%, up from 74.2% same quarter last year
"Broadcom's second quarter revenue accelerated sequentially, and was driven by strength in networking and server storage," said Hock Tan, President and CEO of
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 11.3% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $6.61 billion to $8.1 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).
This was a decent quarter for Broadcom as revenues grew 22.5%, topping analyst estimates by 2.46%.
Broadcom believes the growth is set to accelerate, and is guiding for revenue to grow 23.9% YoY next quarter, and Wall St analysts are estimating growth 11.2% 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.
This quarter, Broadcom’s inventory days came in at 78, 16 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 Q2 Results
With a market capitalization of $217 billion, more than $9 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were impressed by the very optimistic revenue guidance Broadcom provided for the next quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the inventory levels increase. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company currently trades at $549.85 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.
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The author has no position in any of the stocks mentioned.