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Will Broadcom shares see a post-earnings bounce?

Broadcom logo on a mobile device in front of a trading chart

Semiconductor manufacturer Broadcom [AVGO] is set to release third-quarter results on 1 September, and while it is yet to finalise its $69bn acquisition of VMware [VMW], the cloud software company’s better-than-expected results are a good sign for investors.

Despite the upbeat sentiment, the Broadcom share price has fallen 22.4% so far this year (to 29 August) as rising inflation, global recession concerns and weaker consumer demand harm the performance of semiconductor companies. The iShares Semiconductor ETF [SOXX], in which Broadcom has the second largest weighting, has seen its value slump by 24.3% in 2022. In comparison, Nvidia [NVDA] shares have fallen 45% over the same period, while Micron [MU] and Intel [INTC] are down by 40% and 31.6% respectively.

In August, the Biden administration passed the CHIPS and Science Act to support the country’s semiconductor industry, as it aims to increase its chip security. The law includes $52bn in grants to support advanced chip manufacturing, and supplies approximately $24bn in investment tax credits for chipmakers. While these subsidies are a tailwind for the industry, concerns over supressed near-term demand remain amid the broader market weakness.

Broadcom forecasts Q3 revenue rise

Broadcom produced a strong set of second-quarter results in May, but was still unable to turn around its declining share price. The company reported revenue of $8.1bn for the quarter, which marked a 23% rise from the same period a year ago. It also noted a 30% increase in operating profit during the quarter.

Alongside this Broadcom generated $4.2bn in free cash flow and is expecting this to remain strong throughout the third quarter. A total of $4.5bn was returned to shareholders in the quarter, with $1.7bn being returned through dividends and the remaining $2.8bn in the form of share repurchases.

The company’s guidance for third-quarter revenue forecasted a 24% year-on-year rise to $8.4bn, which is in line with analysts’ expectations.

Broadcom finalises VMware acquisition

Broadcom announced at the end of May that it has agreed to acquire VMware for $69.1bn, making it one of the largest technology deals on record. Michael Hewson, chief market analyst at CMC Markets, noted that the deal is “part of a strategy to make Broadcom an even more diversified business than your average chip maker”.

The deal is still subject to a lengthy EU antitrust investigation, with concerns being raised that the acquisition could give Broadcom too much power over price rises. Some VMware clients have expressed fears that they could be tied into buying Broadcom services in the future.

Regulators have already blocked deals this year, with Nvidia having to abandon its $40bn takeover of British chip designer Arm. The US Federal Trade Commission helped to contribute to the breakdown of the deal by launching legal action in December, against what it believed to be an illegal merger that would give Nvidia too much market power.

If the VMware deal goes through, it would turn Broadcom into a diversified tech company with a significant presence in chip production and cloud computing services.

Investors will also be pleased to see VMware’s solid set of Q2 earnings, which it released last week. It reported earnings of $347m on revenue of $3.34bn, representing a 6% increase from the year-ago quarter, and beating analyst expectations.

Analysts rate Broadcom shares as ‘outperform’

Ahead of the company’s Q3 earnings, analysts are upbeat about the Broadcom share price. Out of 25 analysts polled by the Financial Times, seven gave the shares a ‘buy’ rating, 14 believed the shares would ‘outperform’ with the remaining four rating the shares a ‘hold’.

Among 21 analysts offering 12-month price forecasts, the median price target was $675, which represents a 32% premium on Broadcom’s closing price on 29 August.

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