Fabless chip and software maker Broadcom (NASDAQ:AVGO) reported results in line with analysts' expectations in Q3 FY2023, with revenue flat year on year at $8.88 billion. The company also expects next quarter's revenue to be around $9.27 billion, slightly below analysts' estimates. Turning to EPS, Broadcom made a GAAP profit of $7.74 per share, improving from its profit of $7.19 per share in the same quarter last year.
Is now the time to buy Broadcom? Find out by accessing our full research report, it's free.
Broadcom (AVGO) Q3 FY2023 Highlights:
- Revenue: $8.88 billion vs analyst estimates of $8.86 billion (small beat)
- EPS (non-GAAP): $10.54 vs analyst estimates of $10.43 (1.03% beat)
- Revenue Guidance for Q4 2023 is $9.27 billion at the midpoint, slightly below what analysts were expecting
- Free Cash Flow of $4.6 billion, similar to the previous quarter
- Inventory Days Outstanding: 74, up from 66 in the previous quarter
- Gross Margin (GAAP): 74.4%, in line with the same quarter last year
"Broadcom's third quarter results were driven by demand for next generation networking technologies as hyperscale customers scale out and network their AI clusters within data centers," 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 mediocre, averaging 14.1% annually. This quarter, its revenue declined from $8.93 billion in the same quarter last year to $8.88 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 slow quarter for the company as its revenue dropped 0.6% year on year, in line with analysts' estimates.
Broadcom's revenue inverted from positive to negative growth this quarter, but its management team thinks this is but a blip. For the next quarter, Broadcom is guiding to 3.98% year-on-year revenue growth. Analysts also think this outcome is likely, as they're projecting 6.6% growth over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 74, which is 10 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
Key Takeaways from Broadcom's Q3 Results
With a market capitalization of $368 billion, a $12.1 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Broadcom has the resources needed to pursue a high-growth business strategy.
It was good to see Broadcom slightly improve its operating margin this quarter. We were also happy that its EPS narrowly outperformed Wall Street's estimates. On the other hand, its inventory levels materially increased and its revenue guidance for next quarter came in slightly below Wall Street's estimates. Overall, this was a mixed quarter for Broadcom, with revenue guidance likely weighing on shares. The company is down 3.13% on the results and currently trades at $894.01 per share.
So should you invest in Broadcom right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research 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 50% 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 in this report.