Summary
- All that Broadcom did during the FY2022 bear market was growing revenue 21%, growing earnings by 76.9%, growing the dividend by 12%, and generate $16.3 billion in free cash flow (49% of revenue).
- That being the case, it's easy for investors to see why Broadcom is my favorite technology stock and one of the best dividend growth stocks in the entire S&P 500.
- What can we expect from the Q1 FY23 earnings report? AVGO consistently beats consensus estimates and we'll find out on Thursday, March, 2, if they do it again.
- Today, I will review Q1 earnings estimates, what I expect from Broadcom in Q1, and touch on recent developments with Apple and VMWare.
Investors don't need UBS's machine learning ("ML") algorithm to know that Broadcom (AVGO) is one of the best dividend growth stocks in the entire S&P 500 (indeed, all you need do is follow my coverage here on Seeking Alpha). And if you have any doubt about the power and resilience of the "King of High-Speed Networking," all you have to do is re-read the first bullet of this article to see how well the company performed during the 2022 bear market which hit the technology sector harder than most. Clearly Broadcom operates a high-margin and very high-quality business model. Today, I'll take a look at what to expect from Broadcom in its Q1 FY2023 report, which is due out after the market closes on Thursday, March 2. Given the fact that Broadcom has demonstrated a consistent record of beating consensus earnings estimates , history suggests CEO Hock Tan and company will likely do it again.
tipranks.com
As can be seen in the graphic above, Broadcom consistently delivers EPS that beats consensus estimates. However, it's the far right column that impresses me the most: The year-over-year percentage increase in earnings (and free cash flow, which is not shown). Perhaps even more surprising is that the market has valued AVGO stock with only 14.1x forward earnings multiple. And this is why Broadcom has been, and continues to be, my favorite technology stock going forward.
Investment Thesis
As my followers well know, my opinion is that the heart-n-soul of Broadcom is its high-speed networking development platform (both hw & sw) which always keeps the company at least one step ahead of the competition - and that's where the high-margins are. And its entire range of high-speed networking products - from switching, to routing, to high-speed optical interconnect - is likely to continue to be the flagship of the company for many years to come:
One only has to look at yesterday's earnings report from Nvidia ( NVDA ) to understand that demand is still strong for high-performance semiconductors. In Nvidia's case, the current quarter was strong due to a comeback in high-end gaming. Similarly, AMD ( AMD ) continues to show strength in high-end data-center chips (so does NVDA). I mention these two because both of these tech sub sectors, as well as AI/ML and cloud, depend on low-latency/high-bandwidth access to data - data that typically resides in the cloud. Now, what company is the best at delivering low-latency/high-bandwidth data? Arguably it's Broadcom's networking equipment. This is why I always find it somewhat humorous how the market responds to reports like yesterday's from Nvidia. At pixel time this morning, look at how the market responded to NVDA's report:
Note that both NVDA and AMD popped big time this morning. Not that they should not have, but look at the relatively muted response in Broadcom stock - not much right? Meantime, look at the difference in valuation levels, dividends, and yield:
Forward P/E | Dividend | Yield | |
AVGO | 14.1x | $18.40 | 3.20% |
NVDA | 47.8x | $0.16 | 0.08% |
AMD | 25.1x | nil | nil |
In light of these three companies' through-cycle performance, the market valuation of Broadcom is almost laughable to me. After all, for a stock to double in five years - and all things being equal but understanding that they are not - all it needs to do is grow revenue at ~15%/year. As stated in the bullets, Broadcom grew revenue by 21% last year (during a bear market in the technology sector) and turns nearly half of revenue into free cash flow. This is why Broadcom represents such great value and is such a compelling opportunity for investors.
What To Expect From Q1 FY23 Earnings?
The chart below shows the latest consensus EPS estimates per Yahoo Finance:
Yahoo Finance
As you can see, the consensus Q1 FY23 EPS estimate is for $10.11/share, and for the year $40.66/share. As you also can tell, Broadcom is a heavily followed company with more than 20 analysts included in that estimate. However, as the first graphic in this article showed, AVGO typically beats estimates by ~2%, and that will likely be the case again this time. I say that because the NVDA report just came out and these numbers have probably yet to be revised higher as, in my opinion, they should.
That being the case, I suspect AVGO's Q1 EPS will come in at an estimated $10.30/share. If so, note that would be +22.8% compared to the $8.39/share in Q1 of last year .
Revenue is expected to come in at $8.9 billion, which would be +15.6% as compared to the $7.7 billion in last year's Q1.
None of this (excellent performance) should come as a surprise to investors. After all, on the Q4 conference call , CEO Hock Tan said:
In summary, we're guiding consolidated Q1 revenue of $8.9 billion, up 16% year-on-year. While we are fully booked for fiscal 2023 , in this environment, we are not providing you guidance for the year.
This is at least the third year in a row that Broadcom was fully booked at the beginning of a fiscal year. That being the case, and knowing the high-margin that AVGO typically delivers, I can't think of another technology company that has such a clear line of sight into future free cash flow.
VMware
While I admit I tend to gush over AVGO's high-speed networking business, I shouldn't cut AVGO's Enterprise Software Segment short. After all, it too is a high-margin business (if it wasn't, CEO Hock Tan wouldn't own it), and is responsible for annual recurring revenue ("ARR") that delivers additional stability to AVGO's cash-flow profile (and dividend payment). On the previously referenced Q4 conference call, Hock Tan said:
... our ARR, which is annual recurring revenue, the indicator of forward revenue, at the end of Q4 was $5.4 billion, which was up 4% from a year ago. And in Q1, we expect our infrastructure software segment revenue to be flat year-on-year , reflecting core software revenue growth of mid-single-digit percent year-over-year, offset by a year-on-year decline in the Brocade enterprise and business.
That being the case, growth in Q1 is not expected to come from the Software Segment, which is likely why Broadcom made a bid for VMware ( VMW ) in the first place.
As you know, governments around the world are taking a much closer look at big-tech acquisitions, and Broadcom's attempt to buy VMware is certainly no exception. Currently, regulators appear to be focusing on the issue of interoperability and whether or not AVGO's semiconductors could potentially be used to block competitors from inter-operating with VMware's visualization software.
Honestly, I have no idea if the VMware acquisition will eventually be approved or not. Further, I'm relatively ambivalent on the deal. As I have opined previously on Seeking Alpha, Broadcom shareholders will likely win either way. If past acquisitions are any indication, if the deal goes through Broadcom will take on more debt, Hock Tan will wring out additional efficiencies in the business, pay down the debt, and deliver growing free cash flow over time. So it would be a longer-term growth story. If the deal doesn't go through, it just means that Hock Tan will allocate more of its growing free cash flow generation into bigger dividends and share buybacks this year (just like last year when Broadcom did not make a big acquisition).
Apple
Meantime, and for the reasons I explained in my popular Seeking Alpha article CEO Shakedown: Hock Tan Vs. Tim Cook , I expect Broadcom will soon announce another two-year supply deal with Apple ( AAPL ) - the previous one due to expire any day now. I also expect Broadcom to maintain relatively high-margins on that business. As I explained in the piece just referenced, it will be far most difficult for Apple to design - and, very importantly, test and verify - replacements for AVGO's analog RF, WiFi Combo, and mixed-signal custom semiconductor solutions as compared to the predominately digital M1 and M2 processor chips, for which Apple did successfully design-out.
Summary and Conclusion
The bottom line: Broadcom is not only one of the best companies in the entire technology sector, it's an outstanding dividend growth stock and - in my opinion - trades at a deep discount relative to its growth rate and high-margin high-quality business model. AVGO is a Buy.
I'll end with a three-year total returns comparison of Broadcom, Nvidia, AMD, vs. the broad market averages as represented by the Vanguard S&P500 ETF ( VOO ), the DJIA ETF ( DIA ), and the Nasdaq-100 ( QQQ ):
As you can see, Broadcom trails only Nvidia. However, in my opinion, and for the reasons stated in this article, Broadcom appears to offer a more compelling value here, while Nvidia arguably offers a higher risk/reward growth proposition based on its leading position in AI and high-performance computing ("HPC").
For further details see:
What To Expect From Broadcom's Upcoming Earnings