We raised our Broadcom price target after a stock pop that was all about the conference call
Broadcom on Thursday evening reported a strong quarter and a solid guide. But the stock really got going after CEO Hock Tan talked about $10 billion in custom AI-related orders from a new customer. Revenue in the fiscal 2025 third quarter, which ended Aug. 3, increased 22% year over year to $15.95 billion, ahead of the $15.83 billion consensus forecast, according to estimates compiled by LSEG. Adjusted earnings per share increased 36% from the year-ago period to $1.69, also outpacing expectations of $1.65, LSEG data showed. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 30% year over year to a record $10.7 billion in the quarter, beating the FactSet consensus of $10.46 billion. AVGO YTD mountain Broadcom YTD While the results and the outlook were great, commentary on the post-earnings conference call proved to be the most crucial. At around 5:10 p.m. ET, the Club stock soared after Tan revealed a fourth major customer. He did not name the customer. Shares then caught a second leg higher around 5:30 p.m. ET after Tan said he would remain CEO “at least” through 2026. The stock rose more than 4.5% to just above $320. Bottom line Broadcom’s great quarter, solid guide, and the CEO remarks on the call all pointed to sustained strong demand for artificial intelligence semiconductors and networking solutions, housed in the company’s AI solutions segment. VMWare, the software giant Broadcom bought for $69 billion nearly two years ago, continues to power the company’s infrastructure software segment. Margin performance was also impressive with Broadcom’s fiscal Q3 consolidated gross margin expanding 99 basis points, or nearly a full percentage point, year over year; adjusted EBITDA margin expanded 418 basis points, and operating income profit margin expanding a robust 474 basis points. AI-related revenue in the fiscal third quarter grew 63% year-over-year to $5.2 billion. Better yet, Tan said he expects that acceleration to continue in the company’s current quarter, the company’s fiscal fourth quarter, guiding for $6.22 billion in AI-related revenue. Tan also noted that demand for custom silicon from its three key customers – believed to be Alphabet , Club name Meta Platforms and TikTok parent ByteDance – continued to grow. Broadcom is also in talks with additional prospects – last quarter they quantified it as four prospects – to develop custom silicon. In fact, Tan noted on the call that during the quarter, one of the prospects did indeed release a production order for which Broadcom expects to ship product “pretty strongly” beginning in 2026. Tan noted that the company “secured over $10 billion of orders.” The Financial Times is reporting that Broadcom is working with OpenAI. Perhaps, OpenAI is the fourth customer Tan talked about. As a result, management expects AI revenue for the full year “to improve significantly” versus prior expectations. During the Q & A session, Tan said the addition of a fourth customer with “immediate and fairly substantial demand really changes our thinking of what 2026 would be starting to look like.” Tan also said, “Looking beyond what we’re just reporting this quarter with robust demand from AI, bookings were extremely strong and our current consolidated backlog for the company hit a record over $110 billion.” Why we own it Broadcom is a high-quality semiconductor and software company run by an incredible CEO in Hock Tan. The company is a big AI beneficiary through its networking and custom chip businesses. Competitors : Marvell Technology, Advanced Micro Devices and Nvidia Last buy : Nov. 21, 2024 Initiation date : Aug. 24, 2023 We’re certainly pleased to hear about the new customer and Tan’s plans to stay on as CEO. Given the large shoes his successor will ultimately need to fill, we’re thrilled to hear that he’ll be sticking around for the foreseeable future. In the end, it seems that Broadcom is taking share in custom semiconductors and winning with its networking solutions. We felt that Broadcom’s release would not reflect what we saw from peer custom chip name Marvell Technology , with Jim Cramer saying ahead of the release that Tan was “going to deliver.” That conviction is being rewarded. With signs pointing not only to demand for AI solutions sustaining, but strengthening, as we work our way into 2026, we are raising our price target to $350 from $290. However, we are keeping our hold-equivalent 2 rating for the time being as it is not our style to chase a move like the one seen out of Broadcom in after-hours trading. As of the close of Thursday’s regular session, the stock was over 30% year-over-year. Any level above $317.35 in Friday trading would be an all-time high. It’s rather remarkable how Broadcom has fought back from January’s DeepSeek fiasco and early April’s tariff concerns that slammed the stock and the overall market. The S & P 500 finished Thursday with a record-high close. Commentary Broadcom’s fiscal third-quarter Semiconductor Solutions revenue increased 26% year over year to $9.17 billion, exceeding expectations of $9.11 billion, according to FactSet. The result represents yet another sequential acceleration compared to the 17% growth in fiscal Q2 and the 11% growth in fiscal Q1. Gross margin for the segment came in at a solid 67%, though it was a 30-basis point contraction versus the year prior. AI semiconductor revenue, in particular, was $5.2 billion, representing growth of 63% versus the year-ago period, and marking a significant acceleration versus the 46% growth last quarter. Importantly, Tan said on the call, “Demand for custom AI accelerators from our three customers continued to grow as each of them journeys at their own pace towards compute, self-sufficiency and progressively we continue to gain share with these customers.” Broadcom’s AI business has two parts: custom AI accelerators and networking chips, which are effectively part of the “plumbing” of a data center and help its various components communicate together as a larger computing factory. Regarding the legacy semiconductor businesses, the pace of improvement remains sluggish, with saying, “demand continues to be slow to recover, and Q3 revenue of $4 billion was flat sequentially, while broadband showed strong sequential growth. Enterprise networking and service storage were down sequentially. Wireless and industrial were flat quarter on quarter, as we expect.” On the brighter side, we should see some sequential growth here in the current quarter, according to Tan, who added, “Broadband service, storage and wireless are expected to improve while enterprise networking remains down quarter on quarter.” This is in line with Club holding Apple ‘s launch of a new iPhone, which is expected to be unveiled at a product event on Sept. 9. Apple is believed to be Broadcom’s unnamed wireless customer, so we tend to see wireless sales pick up into the launch of a new iPhone as production ramps up. Broadcom’s other operating segment, Infrastructure Software , revenue grew about 17% year over year to $6.79 billion, ahead of the $6.71 billion consensus estimate, according to FactSet. Gross margin for the segment came in at 93%, up from 90% in the year ago period. The VMWare acquisition is clearly working out for Broadcom, and with the company’s investments and ability to cross-sell, it stands to keep growing in the quarters ahead as new features come to market. To this point, Tan said on the call, “What I’m most excited about. After two years of engineering development by over 5,000 developers, we delivered on a promise when we acquired VMware, we released VMware Cloud Foundation version 9.0, a fully integrated cloud platform, which can be deployed by enterprise customers on prem or carried to the cloud. It enables enterprises to run any application workload, including AI workloads on virtual machines and on modern containers. This provides the real alternative to public cloud.” Guidance For its fourth fiscal quarter, which will end on Nov. 2, Broadcom forecasted total revenue to be about $17.4 billion, representing growth of 21% year over year. That target is ahead of the $17.01 billion consensus, according to estimates compiled by LSEG. On the call, Tan highlighted strong demand for AI infrastructure and VMWare solutions as the main drivers of the growth. Importantly, AI revenue is expected to keep growing in the coming quarter, with Tan stating on the release that he expects “growth in AI semiconductor revenue to accelerate to about $6.2 billion in fiscal Q4, delivering eleven consecutive quarters of growth, as our customers continue to strongly invest.” That points to growth of 66% year-over-year, versus the 63% increase we got this time around. Add in the legacy semiconductor business forecast of approximately $4.6 billion, and a Semiconductor Solutions segment guide of about $10.7 billion ahead of the $10.17 billion consensus forecast, according to FactSet. The $6.7 billion Infrastructure Software revenue guide for fiscal Q4, however, looks a tad short versus of $6.86 billion, according to FactSet. The Street, however, clearly isn’t taking issue with it given the strength of VMWare. The company expects fiscal Q4 adjusted EBITDA to be approximately 67% of projected revenue, or $11.658 billion, ahead of the $11.225 billion consensus estimate, according to FactSet. (Jim Cramer’s Charitable Trust is long AVGO, META, AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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