When it comes to benefiting stocks in the AI development, in addition to the popular NVIDIA, Broadcom definitely stands out. As an absolute leader in the communication semiconductor field, Broadcom's network chips are indispensable in data transmission among AI chip clusters. Riding the wave of AI, Broadcom's stock price has been soaring for two consecutive years, becoming a chip giant second only to NVIDIA in market value.

After the U.S. stock market closed on December 12th, Broadcom will announce its latest earnings. Every time the company releases its earnings, it may also signify a good trading or investment opportunity. Before that, investors need to understand how to interpret its performance. How should we analyze Broadcom's performance? We can focus on four key points: revenue growth, profitability, inventory changes, and cash flow and shareholder returns.

1. Revenue Growth

Broadcom is a famous acquirer in the U.S. stock market, with a total acquisition amount exceeding one trillion US dollars in history. Therefore, its business is relatively complex, providing thousands of chips and software-related products, covering enterprise and data center networks, set-top boxes, telecommunications equipment, mobile phones, and base stations, and more.

Specifically, Broadcom's revenue consists of two main segments, including semiconductor solutions and infrastructure software. We can check its specific business composition on the financial module of the Futubull individual stock page.

Previously, the revenue from semiconductor solutions accounted for nearly 80% of the total revenue. However, with Broadcom's acquisition of VMware at the end of 2023 for 61 billion U.S. dollars, the proportion of software business revenue surged to over 40% in the third quarter of the 2024 fiscal year.

In terms of revenue growth, Broadcom's historical performance can be described as very robust. Since 2017, it has been growing every year, and even every quarter. However, due to the impact of the semiconductor industry cycle, Broadcom's revenue growth rate has experienced significant fluctuations. It maintained double-digit growth for ten consecutive quarters since the fourth quarter of the 2020 fiscal year. But from the second quarter of 2023, there has been a decline in growth rate, until the last three quarters, where the growth rate has returned to over 10%, with a nearly 50% year-on-year growth in the third quarter of 2024.

So, what about Broadcom's revenue growth prospects? We can observe by department.

First, let's take a look at Broadcom's largest business: the semiconductor business. This business is further divided into networking, wireless, broadband, storage, and industrial businesses in the financial reports. The revenue growth rate of the semiconductor networking business has been maintained at around 5%, growing relatively steadily, mainly driven by the growth of the networking business.

Why is the networking business able to stand out? This is mainly attributed to the advancement of AI development. Training AI large models requires a large amount of high computational power chips, including NVIDIA GPUs, and the connection between these chips requires the use of Ethernet switches, routers, and other networking chips. This is precisely the coverage area of Broadcom's networking business. At the same time, Broadcom's networking chips are also an indispensable part of ASIC customized chips in the AI ​​field. For example, Google's self-developed server AI chip—TPU AI acceleration chip, Broadcom is also deeply involved in joint research and development.

Another major business of Broadcom, infrastructure software business, has maintained steady growth in the past few quarters. Since the beginning of the 2024 fiscal year, the revenue growth rate has exceeded 100% due to the incremental revenue impact of the VMware business acquired last year. However, even without considering the impact of external acquisitions, based on performance disclosures, Broadcom's original infrastructure software business growth has also been accelerating in the past few quarters.

For future fiscal quarters, we need to observe whether Broadcom's semiconductor networking business can further accelerate its growth under the impetus of AI development, whether other business segments of the semiconductor business can stabilize and rebound with the recovery of the semiconductor cycle, and whether the revenue growth rate of Broadcom's infrastructure software business can maintain a steady upward trend.

2. Profitability

The semiconductor industry has a very high technological threshold, but as long as it occupies a dominant position in a certain area, it can obtain higher bargaining power and profitability. As a leader in the communication chip field, Broadcom's profitability ranks top in the entire semiconductor industry.

From various profitability indicators, Broadcom's gross margin increased from 61.9% in the Q3 fiscal quarter of 2021 to 69.4% in the Q3 fiscal quarter of 2023, and the adjusted net profit margin also increased from 27.2% to 39.5% during the same period. Broadcom's return on equity (ROE) level was also as high as 70% in the 2023 fiscal year.

However, in the past few quarters, Broadcom's profitability has seen a significant decline. Its gross margin decreased to 62.3% in the Q1 fiscal quarter of 2024, and the net profit margin decreased to 11.1% in Q1 2024, with a net profit of approximately 1.33 billion, a significant year-on-year decrease of 64.5%. This is the first time in nearly a decade that Broadcom has experienced a decline in profitability.

The main reason for Broadcom's declining profits is that after acquiring VMware's business, the related integration costs and asset amortization have lowered Broadcom's overall profitability. By 2024Q2, the impact of the acquisition-related costs has eased, but in 2024Q3, Broadcom incurred losses due to one-time tax provision handling issues. In the following quarters, we can observe the recovery of Broadcom's profitability.

3. Inventory Situation

The semiconductor industry as a whole belongs to a growth industry, but it also has cyclical attributes. In view of its cyclical characteristics, inventory levels are a very important indicator to measure cyclical changes and growth expectations. When industry demand declines and oversupply occurs, the company's inventory levels will rise, sales pressure will increase, and this will bring pressure on the stock price. Conversely, when the cycle reverses and demand improves, the company's inventory levels will also decrease rapidly, and sales prospects will improve.

A more appropriate measure of inventory level changes is Inventory/Revenue ratio. The higher this ratio, the higher the inventory level and the greater the sales pressure.

Broadcom's Inventory/Revenue ratio has been maintained at less than 30% in the long term, which is at a very low level within the industry, demonstrating its strength in inventory management. However, this indicator still exhibits certain cyclical fluctuations for Broadcom.

Since the fiscal Q1 2021, Broadcom's Inventory/Revenue ratio has continued to increase, from 14.3% in Q1 2021 to 21.7% in Q3 2022. However, starting from Q4 2023, this ratio began to decline overall, reaching approximately 14.5% in Q3 2024. In future performance, we can continue to observe Broadcom's trend of Inventory/Revenue ratio and see if it can continue to maintain its historical low position.

4. Cash Flow and Shareholder Returns

As one of the giants in the semiconductor industry, Broadcom has a strong voice in the Industry Chain, with not much cash tied up in inventory and accounts receivable. Therefore, its cash flow level is quite strong. Since the fiscal year 2018, Broadcom's accumulated free cash flow has reached $85.5 billion, far exceeding the adjusted net profit of less than $50 billion during the same period. We can also check the company's cash flow in the Futubull stock financial module.

Broadcom's cash flow, apart from being used in business mergers, is mainly used for shareholder returns. In the US stock market, many listed companies reward shareholders through dividends and buybacks. Among them, dividends are the most direct way to reward shareholders, while buybacks can increase the company's return on equity and earnings per share, inject extra liquidity into the market, boost the stock price, and are very popular among shareholders.

From the fiscal year 2018 to the first three quarters of fiscal year 2024, Broadcom's cumulative dividends and buybacks reached 84 billion, which is 1.6 times the adjusted net profit for the same period. Especially in the first three quarters of fiscal year 2024, the amount of dividends and buybacks reached 18.5 billion, exceeding the previous year's full-year total. In terms of shareholder returns, it can be said to be very generous. We can continue to observe whether Broadcom can maintain its excellent historical performance in cash flow and shareholder returns for future performance.

Seeing this, you may have some new insights on how to interpret Broadcom's performance. It is worth mentioning that each time a star company releases its performance, it may represent a rare trading opportunity for different types of investors.

For example, if investors interpret the past performance and combine it with the latest developments and feel that a company's latest performance will release some positive signals, favoring short-term stock price, investors may consider going long. Going long can involve buying stocks or considering buying call options.

Conversely, if investors feel that a company's latest performance will not be optimistic and will put pressure on the short-term stock price, investors may consider going short. Going short can involve considering short selling on margin or considering buying put options.

Of course, if investors feel uncertain about the direction of a company's performance but anticipate significant volatility in the stock price after the performance release, investors may consider trading the volatility of its stock price by buying both call and put options simultaneously using a straddle strategy to seize potential opportunities.

In conclusion,

Regarding Broadcom's performance, we should focus on its revenue growth, profitability, inventory changes, cash flow, and shareholder returns.

In terms of performance growth, we can observe whether Broadcom's networking business and infrastructure software business can maintain accelerated growth, and focus on whether the company's other semiconductor businesses can stabilize and rebound during the industry cycle recovery process.

In terms of profitability, Broadcom is currently affected by integration and amortization expenses from the acquisition of VMware. We can observe the subsequent recovery of its gross margin and net profit margin.

Regarding inventory changes, Broadcom's inventory/revenue indicators are generally lower. We can observe whether they can be maintained at historically lower levels.

In terms of cash flow and shareholder returns, Broadcom has historically had abundant cash flow and has been generous in shareholder returns. We can observe whether it can continue its steady performance from history.

Each earnings release by the company may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.