What Happened?
Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) jumped 5.5% in the morning session after reports revealed that the company is collaborating with Apple, the maker of the iPhone, to create its first server chip specifically designed for artificial intelligence tasks. The news highlights the growing trend of tech giants shifting to in-house chip manufacturing. It also showcases Broadcom's expertise in AI chip design, potentially drawing more attention to the company alongside rivals like Nvidia and AMD.
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What The Market Is Telling Us
Broadcom’s shares are very volatile and have had 21 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago when the stock gained 15.1% on the news that the company reported a "beat-and-raise" quarter. Broadcom exceeded analysts' revenue expectations and shrank its inventory levels. The revenue beat was driven by strong AI demand and VMware, a company it acquired in November 2023.
To provide some color on the AI front, AI revenues in the quarter clocked in at $3.1B, up 280% y/y, driven by strong Google TPU demand and AI networking revenue. This strong AI performance helped to offset cyclical weakness in semiconductor revenue from enterprises and telcos. The software segment also gained from the growing contribution from VMware, which is set to hit a $4B quarterly revenue run rate. In Q2’2024, VMware drove $2.7B in revenue (up from $2.1B in the previous quarter).
Looking ahead, AI revenue in FY24 is expected to exceed $11B and grow over 150% y/y. For the full year, revenue guidance ($50.5 billion at the midpoint) and EBITDA guidance (approximately 61 percent of projected revenue) topped Wall Street's estimates. Similar to Nvidia, the company announced a 10-for-1 stock split. Zooming out, we think this was a great quarter, showing it's staying on track.
Broadcom is up 67% since the beginning of the year, and at $181.23 per share, it is trading close to its 52-week high of $185.95 from October 2024. Investors who bought $1,000 worth of Broadcom’s shares 5 years ago would now be looking at an investment worth $5,668.
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