At last week’s earnings call for Q2 period, Broadcom (NASDAQ:AVGO) announced a 10-for-1 stock split scheduled for July 15th. The fabless semiconductor company headquartered in San Jose, California is following Nvidia’s lead. Since Nvidia’s own stock split took effect on June 10th, turning investors’ one share into 10 shares’ worth, NVDA stock is up nearly 9%.
Just like stock buyback programs, stock splits are becoming increasingly popular to lock in shareholders and attract new ones. Not only do stock splits increase trading liquidity by making shares more affordable, but denominational shift makes cheaper shares more perceptually attractive for retail investors habituated to small-cap stocks.
Additionally, by going cheaper than its rival AMD (NASDAQ:AMD) presently at $130 vs $154 respectively, Nvidia (NASDAQ:NVDA) closed in on its peer, making it even more comparatively enticing. With this psychology in play, in the case of both Nvidia and Broadcom, shareholders see stock splits as a sign of further growth.
But do Broadcom’s fundamentals also follow Nvidia’s?
Broadcom’s Business Model
Akin to AMD and Nvidia, Broadcom relies on outsourcing its chip designs to third-party manufacturing firms (foundries) like Taiwan Semiconductor Manufacturing (NYSE:TSM) or GlobalFoundries (NASDAQ:GFS). This leaves Broadcom’s focus on innovation and marketing, keeping the company agile to market’s needs.
For instance, Broadcom is a supplier of custom tensor processing units (TPUs) to Google (NASDAQ:GOOGL) for its AI workloads, having excluded Marvell Technology (NASDAQ:MRVL) as a potential candidate.
Diverting from the supply of GPUs or CPUs, Broadcom caters to a more base infrastructure layer, ranging from data centers, wireless communications, network controllers, switching chips, enterprise storage, and software solutions. In the latter category, Broadcom bought Symantec (NASDAQ:GEN) in 2019 only to sell it to Accenture (NYSE:ACN).
However, VMware (NYSE:VMW) still operates under Broadcom’s umbrella, having acquired the cyber firm for $69 billion, as a direct competitor to cloud-native CrowdStrike (NASDAQ:CRWD). This diversification, with revenue split between 42% on infrastructure software and 58% on semiconductor solutions, is good news for AVGO shareholders.
Broadcom’s Financial State Tied with Cybersecurity
In the latest Q2 earnings report delivered on June 12th, Broadcom beat earnings per share (EPS) estimate of $10.84 at $10.96. Likewise, Broadcom’s revenue of $12.49 billion beat the estimate of $12.03 billion, per LSEG data. For the non-GAAP net income, which excludes one-time expenditures and stock-based compensation, Broadcom reported a 20% YoY increase to $5.4 billion.
Also excluding VMWare integration and restructuring costs, Broadcom delivered $5.3 billion free cash flow, a YoY uptick of 18%. Owing to VMWare revenue contribution, Broadcom is now forecasting 2024 revenue outlook at ~$51 billion, up 42% from year prior.
Before its acquisition by Broadcom, VMware ended the quarter with $977 million operating income (non-GAAP) and 81.20% gross margin, the lowest on record from the high of 86.90% in 2014. This reduction in profitability is mainly due to the cybersecurity’s competitive arena, presently spearheaded by CrowdStrike Holdings Inc (NASDAQ:CRWD).
However, having learned from Symantec’s acquisition, Broadcom’s restructuring efforts are likely to more than compensate for the costly $69 billion purchase. In the pre-acquisition quarter, VMware generated 34% YoY growth in software as a service (SaaS) revenue via subscriptions.
Within a couple of years, VMware’s multi-cloud momentum of 36% SaaS ARR (annual recurring revenue) is poised to compound on AI-driven networking and data center demand.
Analyst Forecasting of AVGO Shares
Year-to-date, Broadcom stock is up 68%. At the present price of $1,825, AVGO shares are above the all-time high of $1735 on June 14. Over the last 52 weeks, the average price of AVGO stock is $1083.11 per share.
Per Nasdaq’s forecasting aggregation, AVGO stock is headed for an average price target of $1886.43 per share, which will be divided by 10 next month. At that point, Broadcom will be in the range of TSMC (TSM), currently priced at $178 per share.
Considering that VMware’s business model of long-term contracts and high-switching costs for clients is sticky, that stickiness transferred to Broadcom. Although Broadcom’s own revenue model is sticky, its core hardware business is more cyclical, now offset by the pricey acquisition.
In the end, Broadcom’s dual market segments are forecasted to double in size. Fortune Business Insights puts cybersecurity market CAGR at 13.8% by 2030, while AI infrastructure market size is heading for a CAGR of 20.4% by 2032.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.