The appetite for AI remains strong, as evidenced by Broadcom's (AVGO, Financial) impressive Q2 beat-and-raise despite ongoing cyclical weaknesses in enterprises and telecoms. The semiconductor and software giant's double-digit organic revenue growth was almost entirely driven by AI, which surged by 280% year-over-year. This robust AI demand led AVGO to raise its FY24 revenue outlook by $1.0 billion to around $51.0 billion. Additionally, AVGO announced a ten-for-one stock split, adding to investor enthusiasm by making shares appear cheaper and benefiting options traders.
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VMware, a virtualization software and cloud computing platform, contributed significantly to AVGO's robust year-over-year revenue growth for two consecutive quarters, adding roughly 31 points to the company's consolidated 43.0% increase to $12.49 billion in Q2. The other 12 points came from AI, which comprised a quarter of AVGO's total sales, up from 19% in Q1. This highlights the rapid growth in AI demand.
- AVGO's integration of VMware is progressing well, transitioning all VMware products to a subscription licensing model. Management anticipates VMware revenues to accelerate towards a $4.0 billion per quarter run rate, pushing operating margins closer to those in AVGO's overall Infrastructure Software segment.
- AI spending also boosted AVGO's Semiconductors segment, particularly its networking end market, which saw a 44% revenue increase year-over-year. Hyperscale customers are ramping up investments to enhance AI accelerator performance. CEO Hock Tan stated that the strength in AI should continue, leading to a raised networking revenue growth projection of +40% year-over-year in FY24, up 5 points from the previous forecast.
- Outside of AI and VMware, other developments were less impressive. In wireless, comprised entirely of sales to Apple (AAPL, Financial), revenues grew just 2% year-over-year while slipping by 19% sequentially due to typical seasonality. For FY24, AVGO reiterated its flat growth outlook.
- Server storage connectivity and broadband faced a 27% and 39% drop in sales year-over-year, respectively, in Q2. AVGO is optimistic that Q2 marked a bottom in server, expecting a modest recovery in the latter half of the year. Similarly, in broadband, where demand remains weak due to a pause in telco spending, AVGO forecasts a bottom to occur in the second half of 2024 with a recovery in 2025.
With shares up nearly 60% year-to-date following a 100% surge in 2023, AVGO faces risks, particularly from NVIDIA (NVDA, Financial), which is launching its latest Blackwell chip this year, potentially affecting demand for AVGO's custom chips. NVDA also announced the upcoming launch of their Spectrum-X Ethernet switch, which could compete with AVGO. However, CEO Tan mentioned that NVDA does not directly compete with AVGO, though he acknowledged potential competition in the Ethernet segment.
Overall, AVGO's Q2 report highlights that AI continues to significantly support the company, offsetting cyclical weaknesses in handsets and telecoms. Unless the demand for AI among big tech declines, AVGO remains in a strong position.
