Broadcom's Q3 Earnings: AI Growth Slows, Legacy Business Struggles

While the overall numbers in Broadcom's financial report appear satisfactory, a closer look reveals some underlying concerns. The report shows that the company's total revenue for the quarter met market expectations, with growth primarily driven by artificial intelligence (AI) technologies. However, the company's guidance for the next quarter, at $14 billion, fell slightly short of market expectations of $14.1 billion, a minor discrepancy but one that warrants attention.

Upon further examination of the company's specific business data, several potential issues emerge. First, the company's growth is largely attributed to the consolidation and growth of VMware, rather than a significant boost from AI technologies in Broadcom's traditional business.

VMware contributed approximately $3.8 billion in revenue for the quarter. Excluding VMware's revenue, Broadcom's traditional semiconductor and software businesses experienced only marginal single-digit growth, indicating that the company's legacy business has yet to benefit significantly from the demand for AI technologies. It's worth noting that Broadcom acquired VMware for $61 billion at the end of 2023, and now the company's market value growth of over $700 billion is almost entirely reliant on VMware's performance.

Previously, Broadcom's rising stock price was partly due to market expectations that the company's business would be driven by overall AI demand. However, with the traditional business growth lagging and relying solely on VMware's growth (with an estimated annual revenue of about $12 billion), it is challenging to support the company's current market value. This could impact investor confidence and potentially exert pressure on the company's stock price in the future.