Broadcom Ltd. (AVGO, Financial) has displayed strong signs of upward momentum this year, surging nearly 37% year to date. The chip giant reported strong third-quarter results on Aug. 24. Despite reporting strong quarterly results, shares of Broadcom were down 1.5% after the close mainly due to a higher expectation.
For the third quarter, the company reported earnings per share of $4.10, beating the analyst’s estimate by 7 cents and representing a surge of almost 42% year over year. Its revenue came in at $4.47 billion, in line with the consensus. That figure, though, represents a surge of 18% year over year.
On the other hand, Broadcom’s gross margin was 63.3%, 30 basis points (BPS) greater than the estimates, which suggests that things carry on moving in the right direction. Non-GAAP operating margin topped analysts’ estimate by 80 BPS, which shows exciting margin expansion.
The chip giant displayed impressive growth in all of its segments during the third quarter. The wired infrastructure and wireless communications divisions produced revenue of $2.2 billion and $1.28 billion, a year-over-year surge of 7% and 27%.
Its enterprise storage division generated $735 million in revenue, up 39% year over year driven mainly by SDD and HDD shipments. Its industrial and other segment produced $238 million in revenue, up 18% year over year driven by higher IP sales.
The wired infrastructure division carries on to be one of the key drivers for the chip giant’s top line primarily due to its enormous size. The revenue from wired infrastructure segment accounted for 50% of the company’s total revenue during the third quarter. In this particular division, there are several vital trends, comprising cloud industry and Big Data industry, working in favor of Broadcom.
Although wired infrastructure business is not a massive growth business for Broadcom now, it is highly profitable, hefty and still delivering a reasonable amount of growth. As the cloud industry and Big Data industry are projected to grow at a rapid pace in the future, there will be a huge demand for the company’s products going forward.
Most importantly, cash from operations increased to $1.65 billion, up $687 million compared to that in the same quarter a year ago.
Not only had this, but the company also throws light on an even stronger fourth quarter. It expects fourth quarter revenue of $4.8 billion, plus or minus $75 million along with a non-GAAP gross margin of 63%, plus or minus 1%. Also, it projects non-GAAP earnings per share of $4.48, up considerably from $3.47 a year ago.
As a matter of fact, Broadcom agreed to buy Brocade for $5.9 billion in November 2016. Due to some approval issues, though, the company has not been able to close the deal yet. The company formerly received regulatory clearance in the U.S., EU as well as Japan, and recently received approval from China’s commerce ministry.
Broadcom and Brocade are aggressively trying to close the deal and expects to close it before Oct. 28. Apart from Cisco (CSCO), Brocade is the only fiber channel (FC) switching vendors. The Broadcom-Brocade deal also involves other networking vendors as Broadcom only needs Brocade FC networking products and has sold off other pieces of Brocade’s business.
Summing up
Although shares of Broadcom are up nearly 90% over the past 18 months, its future growth still looks healthy. The chip manufacturing giant also offers a healthy forward dividend yield of 1.7%.
With the rising stock price, though, its price-earnings (P/E) ratio has also increased abruptly. The stock trades at a P/E of almost 200, suggesting it is expensive. As a result, shareholders seeking to initiate a position in the stock should wait for a better entry point.
Disclosure: No positions in the stocks mentioned in this article.