Key Points
- Broadcom shares are in a healthy correction and setting up for another rally that may start soon.
- AI and VMWare are driving growth, expected to accelerate as the year progresses.
- Analysts are raising their price targets and may catalyze a rebound that reaches new highs before mid-year.
- 5 stocks we like better than Broadcom
The price action in Broadcom Inc. NASDAQ: AVGO began correcting after its FQ1 earnings release, and it may move lower, but this is a near-term phenomenon investors should embrace. Broadcom's market pulled back not because of weakness or guidance but because of market conditions for semiconductor stocks and bad news for its largest client, Apple NASDAQ: AAPL. Regarding market conditions, Broadcom and other chip leaders have rallied strongly for many quarters and are ready for a healthy correction. The market may move as low as $1155 to align with the analysts' consensus, but a sell-off is unlikely to get that deep.
Broadcom has Sold a Quarter, Guides for Acceleration
Broadcom had a solid quarter, with strength in both segments contributing to growth. The company’s $11.96 billion in revenue is up 34.1% YOY, beating consensus by 200 basis points on acquiring VMWare and a small 4% gain in the Semiconductor segment. Infrastructure Solutions, which includes VMWare, is up 153% YOY. Gains in the semiconductor segment are noteworthy because they include growth despite weakness in some end markets.
More importantly, the acquisition of VMWare is helping to sustain solid margins and drive earnings. GAAP earnings are up 31% YOY, adjusted 6.4%, with FCF margin holding near 40%.
FCF topped $6.9 billion and is being put to good use, paying down debt incurred during the VMWare acquisition, repurchasing shares, and paying dividends. The company’s cash balance fell YOY, but the cash burn included repurchasing 7.7 million shares and paying dividends. Cash flow and FCF are expected to improve as the year progresses, so balance sheet improvements and capital returns should continue.
Guidance forecasts business acceleration in the following quarters. VMWare and AI are expected to lead the company to 40% FY growth, with strength expected in the 2nd half. Because the company is outperforming now and AI is gaining momentum, it will likely outperform.
Analysts Raise Targets for Broadcom on AI Outlook and VMWare
Analysts' activity following the Q1 release favors higher share prices, not lower. Marketbeat.com tracks more than a dozen reiterated price targets and upward revisions, with the consensus advancing and this stock trading at a new high. Bank of America issued the new high price target of $1680, about 30% above the current action, pointing to 2nd half strength led by the VMWare acquisition and AI. Other highlights from the analysts' chatter include a forecast for AI to drive business acceleration, normalizing of legacy markets in the 2nd half, free cash flow, and dividends.
Apple has suffered recently, and its share prices have been decreasing. The bad news for it includes pulling out of the EV race, a hefty fine from the EU, and weak iPhone sales in China. Sales in China slumped nearly 25% due to weak market conditions and competition and are not expected to recover soon.
Analysts believe Apple lags in AI but haven’t ruled out future success. They expect the company to weather the downturn as in the past, and some catalysts are on the horizon. Among them is its World Wide Developer Conference, where CEO Tim Cook is expected to reveal the company’s AI plans, which will likely include Broadcom technology.
The Technical Outlook: Broadcom Hits a Peak, Correction in Progress
The technical action in Broadcom shows the market at a peak. The candle formed is the most substantial bear candle formed in years, so the consolidation could take some time. The first best target for support is near the 30-day moving average, which may not be strong enough. The next target is slightly below, near $1200, and a better target for firm support. If the market can sustain support at or near these levels, it could set new highs before mid-year. If not, new highs may not be seen until the 2nd half. Critical resistance is near $1400. A move above that will open the door to another sustained rally.
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