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  • Earnings
  • disruptive innovation

Will earnings boost Broadcom's share price?

The Broadcom [AVGO] share price gained 13.94% in the year to date to 30 August, closing at an all-time high close of $507.85. Over the trailing 12 months, the Broadcom share price gained 43.71%.

A recent trough appeared on 18 August, when the Broadcom share price closed at $468.97. Since then, the stock has recovered 6.37%. The recent rally in semiconductor stocks has been driven in part, by accelerating demand in “strategic automotive and industrial end-markets,” according to rival ON Semiconductor Corp [ON] CEO Hassane El-Khoury. 

The Broadcom share price has lagged behind the ON share price in recent weeks, growing 2.77% in the past month compared to ON’s 18.26%. ON outperformed the S&P 500 during this period and Broadcom nearly did, with the index gaining 3.03% over the past month.

Broadcom also lags the majority of its peers during this period. Broadcom is the number one holding in the First Trust Nasdaq Semiconductor ETF [FTXL], with a 7.96% weighting as of 31 August. FTXL gained 2.63% over the past month. In 2021 to date, it gained 16.12%.

ON’s share price was boosted heavily in that period by an encouraging set of results on 2 August, so Broadcom has every chance of regaining that ground if its upcoming earnings report, scheduled for after markets close on 2 September, can produce a similar positive surprise.

 

Street expectations for upcoming earnings

According to analysts, Broadcom, that follows a October-September financial year making the trimester ending June 30 its third quarter, is on track for a strong earnings announcement. Zacks consensus earnings estimate forecasts $6.88 per share, a 27.41% increase year over year. CNN Money’s panel yields the same consensus earnings forecast. 

The Zacks consensus sales forecast of $6.76bn is 16.06% above last year’s equivalent figure of $5.82bn. CNN Money’s panel has a similar consensus sales estimate of $6.8bn. There is a tight clustering of sales estimates in both panels, with Zacks estimates ranging between $6.75bn and $6.79bn and CNN Money’s ranging from $6.7bn to $6.8bn.

Harsh Kumar, senior research analyst at Piper Sandler, feels that Broadcom is well-positioned compared to the rest of the silicon chip industry, “given its discounted valuation and sticky software business,” as reported by The Street. Piper Sandler maintains an ‘overweight’ rating on Broadcom and raised its price target from $500 to $525 on 2 June. Both panels yielded low earnings forecast of $6.66, but CNN Money’s high estimate of $7.33 is well above Zacks’ most optimistic forecast of $6.97, and would represent 35.74% earnings growth year over year if it materialises.

Given earnings are expected to grow faster than sales, and Kumar’s thesis that it is customer retention that gives Broadcom a competitive advantage over its peers, any deviation from the narrow cluster of sales figures will likely have a big impact on Broadcom’s share price post-earnings announcement. 

A dip would indicate a fall in its supposedly sticky customer base, whereas an increase would indicate growth potential that the market isn’t currently factoring in.

 

Previous earnings report performance

Broadcom’s sales figures have been consistent over its recent earnings reports. Last quarter’s $6.61bn beat analyst expectations by a modest 1.57%, with the previous two quarters seeing reported sales beat expectations by 0.70% and 0.77%. Across those three earnings reports, sales rose just 2.16% from $6.47bn to $6.61bn.

Earnings likewise have typically come in close to analyst expectations. Last quarter’s EPS of $6.62 beat expectations by 2.80%, and was a 28.79% increase year-over-year. Again, earnings growth was steady over the preceding two quarters, with EPS increasing 4.25% between October 2020 and April 2021 from $6.35 to $6.62. 

After the previous quarter was announced, Hock Tan, president and CEO of Broadcom, said: “Due to the strength in demand for semiconductors across our multiple end markets, we delivered 20% year-over-year increase in semiconductor revenue.”

He added, “Our third quarter outlook projects this year-over-year growth to sustain, as we continue to see strong demand from service providers and hypercloud.”

The Broadcom share price gained 2.19% on 4 June, the day following the after markets close announcement of last quarter’s earnings.

Disclaimer Past performance is not a reliable indicator of future results.

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