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Broadcom Looks Bright Post Earnings: Will the Momentum Stay?

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A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Indicators of a stock's bullish run include a rise in share price and strong fundamentals. Though there may be some concerns regarding the stock but they are transitory in nature.

Broadcom Limited (AVGO - Free Report) is one such technology stock that has been on healthy growth trajectory, post first-quarter 2018 earnings. It has rallied 16.9% year over year, outperforming 11.3% growth recorded by the industry it belongs to.

Upbeat Q1 Results

Broadcom delivered impressive first-quarter fiscal 2018 results. Earnings of $5.12 per share beat the Zacks Consensus Estimate by 8 cents. The figure improved 41% from the year-ago quarter and 11.5% sequentially.

Non-GAAP revenues from continuing operations were $5.33 billion, which increased 28% from the year-ago quarter and 10% on a sequential basis. The figure was slightly higher than the Zacks Consensus Estimate of $5.25 billion.

Encouraging View

For second-quarter fiscal 2018, Broadcom forecasts non-GAAP revenues of almost $5 billion (+/- $75 million).

The company projects growth to be driven by increasing traction of 10G technology to support broadband video delivery. Further, the company expects an increase in demand for networking products from cloud and data centers, as well and broadband access products, to positively impact Wired Infrastructure revenues.

Management stated that Enterprise Storage segment results in the second quarter of fiscal 2018 will benefit from Purley product cycle, robust demand from enterprise and data centers and recovery in HDD demand. The segment will also include Brocade Fiber Channel SAN business that is expected to generate a partial-quarter revenue contribution.

The company expects double-digit sequential growth in industrial product revenues and projects growth in resale.

Broadcom believes that the storage business will benefit from strong adoption of All-Flash arrays in storage appliances infrastructure that uses the company’s PCI Express and NVMe technology.

Industrial shipments and resale are likely to grow, which will drive segmental revenues in the second quarter. For the rest of 2018, strong adoption and ramp up of the company’s optical isolation product will continue to drive growth for electric vehicles.

Positive Earnings Surprise History

Broadcom has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, recording a positive average earnings surprise of 3.79%.

Further, it has a long-term expected EPS growth rate of 13.75%.

Upward Estimate Revisions

Over the last 60 days, fiscal 2018 estimates were revised upward, taking the Zacks Consensus Estimate up from $19.49 to $19.76 per share.

Other Growth Drivers

Early in the first quarter, Broadcom completed the long-delayed Brocade acquisition. It completed the divestiture of Brocade's campus WiFi and switch business to Arris for $800 million in cash. Moreover, it sold Brocade's headquarter building in Santa Clara for approximately $225 million in cash. The addition of Brocade will help the company further penetrate the FC SAN market and garner competitive prowess in the long run.

The company is benefiting from strong demand of its wireless solutions and expanding product portfolio, which makes it well-positioned to address the needs of rapidly growing technologies like IoT and 5G. The company also has strong ties with leading OEMs across multiple target markets that will aid it to gain key insights into the requirements of customers. Moreover, the upcoming launch of the next generation WiFi products is expected to be a catalyst for the segment.

Risk Persists

Customer concentration, intensifying competition, integration risks due to frequent acquisitions and leverage balance sheet are key headwinds. Further, President Trump recently released an order, asking Qualcomm (QCOM - Free Report) to immediately and permanently abandon its proposed takeover by Broadcom on grounds of national security concerns. This doesn't bode well for the company.

Zacks Rank & Key Picks

Currently, Broadcom carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the technology sector are NVIDIA Corp. (NVDA - Free Report) and Paycom Software, Inc. (PAYC - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings estimates for NVIDIA and Paycom Software are currently pegged at 10.25% and 25.75%, respectively.

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