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Is Broadcom (AVGO) Stock Worth Buying Ahead of Q2 Earnings?

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Broadcom (AVGO - Free Report) is set to report its second-quarter fiscal 2024 results on June 12.

The Zacks Consensus Estimate for revenues is pegged at $12.04 billion, suggesting growth of 37.88% from Q2 2023 reported figures.

The consensus mark for earnings has increased 0.8% to $10.79 per share over the past 30 days, indicating 4.55% growth from Q2 2023.

Broadcom’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average earnings surprise being 2.81%.

Fiscal second-quarter results are expected to have benefited from Broadcom’s expanding Generative AI (GenAI) portfolio. In the first quarter of fiscal 2024, AI revenues quadrupled year on year to $2.3 billion.

The Zacks Consensus Estimate for fiscal second-quarter Semiconductor Solutions revenues are pegged at $7.14 billion, indicating 4.8% year-over-year growth.

Broadcom Inc. Stock Price, Consensus and EPS Surprise

Moreover, continued strong bookings at VMware are expected to have driven top-line growth. Broadcom expects to achieve double-digit percentage sequential growth through the rest of the fiscal year.

Strong AI Portfolio Aids AVGO’s Prospects

AVGO’s long-term prospects are expected to benefit from the growing demand for AI infrastructure and the robust deployment of the Generative AI (GenAI) portfolio. Broadcom’s solutions are suitable for addressing the needs of an increasing AI workload and the growing need for fast networking in data centers.

Broadcom’s third-generation RoCE pipeline, low-latency congestion control and innovative telemetry features make its latest 400G PCIe Gen 5.0 Ethernet adapters ideal for high-bandwidth, high-stress environments typical of AI infrastructure.

AVGO’s Bailly is the world’s premier 51.2 terabits per second (Tbps) co-packaged optics Ethernet switch. This product integrates cutting-edge silicon photonics technology with Broadcom’s StrataXGS Tomahawk 5 switch chip. Tomahawk 5 provides a major performance boost for AI and machine learning infrastructure.

A solid portfolio is helping in expanding clientele that includes the likes of Alphabet (GOOGL - Free Report) and Meta Platforms (META - Free Report) . Broadcom’s strong partner base, which includes Microsoft (MSFT - Free Report) , is also noteworthy.

Alphabet is one of the large customers of Broadcom’s application-specific integrated chips (ASICs). These chips are designed to support AI and machine learning and make these tasks more efficient. Meta Platforms has also become an important customer as it is using AVGO’s ASICs to develop Metaverse hardware.

Broadcom expands ties with Google

The Broadcom-Google relationship further expanded in April after the companies announced an expanded partnership that focuses on leveraging Google Cloud’s capabilities for VMware workloads, enhancing user experiences and simplifying operations with GenAI.

Broadcom and Microsoft recently expanded their long-standing partnership with plans to support VMware Cloud Foundation subscriptions on Azure VMware Solution. This provides an additional purchase option for Azure VMware Solution, which has been sold and operated by Microsoft since 2019.

Broadcom now expects fiscal 2024 AI revenues of roughly $10 billion (higher than previous guidance of $7.5 billion) and to account for 35% of semiconductor revenues (higher than previous guidance of 25%).

Networking revenues are expected to rally 35% year over year, driven by the accelerating deployment of networking connectivity and the expansion of AI accelerators within hyperscalers.

Key AVGO Headwinds: Sluggish Broadband & Server Storage

Although rapid GenAI adoption bodes well for Broadcom’s long-term prospects, we expect sluggishness to continue in the enterprise and telecommunication end markets. Lackluster spending by telecommunication companies is hurting broadband growth. Weak demand for server storage connectivity solutions is a concern.

Along with a challenging macroeconomic environment, these factors are expected to hurt Broadcom’s top-line growth in the near term.

Moreover, AVGO has a Value Score of F that reflects stretched valuation at the current level.

Hence, investors should wait for a better entry point for Broadcom, which currently has a Zacks Rank #3 (Hold).  

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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