Can Broadcom (AVGO) Earnings Bring Investors Confidence Back To Semiconductor Stocks?

The Philadelphia semiconductor index, known as SOX, plunged 7.8%. The SOX includes the 30 largest semiconductor stocks traded in the U.S.

Broadcom is scheduled to report its quarterly earnings on 05 Sep 2024 after market close and is expected to report a 46.0% increase in revenue to $12.96 billion from $8.88 billion a year ago.

Earnings per share consensus estimate is for $1.22 per share. Broadcom stock price might be affected by how investors would be adjusting their portfolio exposure to semiconductor stocks following Tuesday rout in the semi.

investors likely wanted to lower their exposure to semiconductor stocks amid increasing risks of a "hard landing" for the economy. First, data out Saturday showed that China's factory activity contracted for a fourth straight month in August, Bloomberg reported. The news is the latest sign that the world's second-largest economy may struggle to meet its growth target for the year.

Second, the Semiconductor Industry Association on Tuesday reported below-seasonal chip sales for the month of July. UBS analyst Timothy Arcuri said the 11.1% drop in chip sales from June to July was below the 5-year and 10-year averages.

"Memory was the main downside driver," Arcuri said in a client note. "Key segments including MCU (microcontroller unit), DSP (digital signal processor) and analog posted declines that were worse than their respective seasonal trends over both the past five and 10 years."

As of September 3, 2024, Broadcom Inc had a $757.9 billion market capitalization, compared to the Semiconductors median of $1.1 million. Broadcom Inc’s stock is NA in 2024, NA in the previous five trading days and up 65.56% in the past year.

Currently, Broadcom Inc’s price-earnings ratio is 66.0. Broadcom Inc’s trailing 12-month revenue is $42.6 billion with a 24.1% net profit margin. Year-over-year quarterly sales growth most recently was 43.0%. Analysts expect adjusted earnings to reach $4.775 per share for the current fiscal year. Broadcom Inc currently has a 1.4% dividend yield.

Broadcom is currently well-positioned to benefit from rising generative AI investment in the long term. It is the second-largest global accelerator vendor behind Nvidia NVDA in terms of its custom chip business. It positively commented that its merchant networking chips for AI should rise faster than its accelerators this year.

Broadcom should see strong medium-term growth for its custom accelerators, with a growing customer base that includes Google GOOG and Meta META. We also believe Ethernet networking will take significant share from Nvidia’s Infiniband in generative AI networks over the next five years, which should greatly benefit Broadcom as the top player in high-speed Ethernet merchant networking chips.

If we looked at the last income statement we could expect the networking revenue for generative AI should rise in line with accelerator spending, this might be something that could set Broadcom apart from the rest of semiconductor stocks.

Based on 23 Wall Street analysts offering 12 month price targets for Broadcom in the last 3 months. The average price target is $197.05 with a high forecast of $240.00 and a low forecast of $170.00. The average price target represents a 28.97% change from the last price of $152.79.

If we looked at AVGO stock price, it is undervalued at the current, based on how we expect the AI demand to benefit Broadcom in terms of networking for AI as well as the chip side, we could see a significant improvement in Broadcom upcoming earnings.

With a more than 25% returns on its stock price, we could be expecting Broadcom to come out as one of the survivors in this recent semiconductor stocks sell-off.

But what is important is whether investors are moving away from this stock, based on yesterday (03 Sep) more than 6% decline, that could be due to profit taking. I am expecting investors to come back for AVGO earnings.

Technical is showing AVGO heading for downside movement from both MACD and KDJ, and what AVGO really need is an earnings surprise and a positive outlook for its product and services demand.

The performance of its acquisition of VMware should be giving results and this could be something investors would look at as well.

I will be planning to take a position when the stock price stabilize around $150.

I would be focusing on AVGO earnings whether it will be a surprise and it outlook forecast for both the chip and networking business. This would be important because if AVGO manage to perform in these 2 areas, likely it will be one of the performing semiconductor stocks while the rest might suffer decline.

Appreciate if you could share your thoughts in the comment section whether you think Broadcom would be able to differentiate from the rest of semiconductors stocks after its earnings.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.