Chip stocks have been a weak link for the US stock markets. Every major chip stock has fallen after the earnings release over the last two months as the industry has now transitioned from being supply constrained to demand-constrained. Broadcom (NYSE: AVGO) is meanwhile defying the trend and is trading in the green today after reporting its fiscal third quarter 2022 earnings.
Broadcom reported revenues of $8.46 billion in the quarter which were 25% higher YoY and were ahead of the $8.37 billion that analysts were expecting. Its adjusted EPS of $9.73 was also ahead of the $9.56 that analysts were expecting.
Broadcom reported free cash flows of $4.3 billion in the quarter which is half of its sales. The metric looks quite encouraging and Broadcom has been using the excess cash to reward stockholders in the form of dividends and stock repurchases.
During the fiscal third quarter, AVGO returned $3.2 billion to stockholders of which $1.5 billion was stock repurchases while the remaining $1.7 billion was in the form of dividends. Broadcom has a dividend yield of 3.3% and is among the list of companies that pay high dividends.
However, Broadcom has $39.5 billion as gross debt. After adjusting for $10 billion in cash, the net debt comes to almost $30 billion.
Broadcom Posted Better Than Expected Earnings
Meanwhile, Broadcom’s earnings release came in as a welcome break for investors. While chip stocks have anyways been weak in 2022, they slumped yesterday after reports emerged that the US government has restricted some chip sales to China.
Nvidia stock crashed yesterday as the company warned of a $400 million hit to its topline from the new regulations. Some of the analysts also trimmed Nvidia’s target price after the export restrictions.
Meanwhile, all the chipmakers have provided a dismal forecast. Nvidia for instance guided for revenues of $5.9 billion for the current quarter which was $1 billion lower than what analysts were expecting. It has also lowered its guidance for the previous quarter just days before the earnings release. Both its gaming and data centre business is witnessing a slowdown.
Broadcom Provided Strong Guidance
Broadcom said that it expects to post revenues of $8.9 billion in the fiscal fourth quarter of 2022 with an adjusted EBITDA margin of 63%. The guidance implies a YoY growth of 20% in sales in the October quarter. It said that the free cash flows would also be strong in the quarter. The strong guidance was in contrast to other chipmakers like Micron, Intel, and Nvidia.
The anomaly meanwhile looks more due to the end market exposure. Companies that supply chips to PC makers are witnessing a severe slowdown as sales of PCs are expected to fall by 10% this year.
Commenting on the guidance, Broadcom said, “We expect solid demand across our end markets to continue in the fourth quarter, reflecting continued investment by our customers of next generation technologies in data centers, broadband, and wireless.”
Chip Stocks Have Been Weak in 2022
Broadcom has a much lower exposure to the consumer sector which is why it has been immune from the falling gadget sales. It pointed to the strong end-user demand and said that its lead time is 50 weeks and has a total order backlog of $31 billion. It also made it categorically clear that it is not impacted by the China export restrictions.
During the earnings call, Hock Tan, AVGO’s CEO said, “From our vantage point, infrastructure spending is still very much holding.” Broadcom is also a 5G play as more countries increase investment in 5G and pivot away from 5G.
Meanwhile, even Broadcom has not been immune from the sell-off in chip stocks and is down 26% for the year. Federal Reserve’s rate hikes have played a dampener on US stocks.
At the recently held Jackson Hole Symposium, Fed chair Jerome Powell dashed all hopes of an early pivot from rate hikes. Both stocks and cryptos plunged after Powell’s hawkish comments.
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