Broadcom (AVGO) could see upside to its latest quarterly results and guidance driven by artificial intelligence and VMware, Oppenheimer said Friday.
The chipmaker is scheduled to report its fiscal third-quarter results Thursday. Oppenheimer expects earnings of $1.23 a share on sales of roughly $12.88 billion. Analysts polled by Capital IQ are looking for $1.20 and $12.96 billion, respectively.
Broadcom’s semiconductor and software businesses are poised for sequential growth for the quarter, with the former likely logging a 7% annual rise, according to Oppenheimer. Within semiconductor, networking growth is likely to be driven by cloud service provider demand for custom AI application-specific integrated circuits, or ASICs, and Ethernet switches. The wireless division is likely to advance sequentially and annually ahead of the upcoming Apple (AAPL) iPhone 16 refresh, the brokerage said in a note to clients.
Within wireless, the company’s server and storage business is expected to see an annual decline in the third quarter, with a “modest” recovery likely in the second half, Oppenheimer analysts Rick Schafer, Wei Mok and Dustin Fowler said. The broadband segment is seen approaching the trough in the quarter, with recovery likely to start in the January quarter, the analysts wrote.
Broadcom’s VMware growth strategy comprises converting and upselling perpetual license customers to software-as-a-service upon renewal. The company’s management sees “sustained” growth over the next three years as multiyear contracts renew, the analysts wrote.
Broadcom agreed to acquire multi-cloud services provider VMware in May 2022 in a roughly $61 billion deal that closed last November. Almost one-third of VMware’s 10,000 target customers have now been converted, Oppenheimer said.
This year, contribution from AI to Broadcom’s results is expected to exceed $11 billion, compared with $7.5 billion entering the year, according to the note. The company holds a “dominant share” of custom ASIC market, led by sales to Alphabet (GOOG, GOOGL), Facebook parent Meta Platforms (META), and TikTok parent ByteDance, the trio wrote. Broadcom and Marvell Technology (MRVL) are likely “in the running” for Microsoft (MSFT)-backed OpenAI accelerator, they wrote.
Broadcom’s “cash cow” wireless business is expected to be flat this year, the analysts said, adding that there’s potential for VMware sales to top $4 billion a quarter by the end of the year as perpetual licenses convert to SaaS.
Broadcom’s shares were up 2% in Friday trade, and have increased 43% so far this year.
Oppenheimer called Broadcom the “top AI play” after Nvidia (NVDA). “Core franchises across networking, wireless, broadband, server/storage, and software support steady sustainable growth and cash return,” the analysts said, adding that they remain long-term buyers of the Broadcom stock.
The brokerage reiterated its outperform rating and a $200 price target on the stock.