Time to Buy Broadcom, Shuffle Semiconductor Mix, After Call Drives Stock Down
Broadcom management pushed its shares lower after a call with investors but that's a nice opportunity to initiate.
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On Thursday evening, Broadcom (AVGO) released the firm's fiscal fourth quarter financial results. The results were very positive. The stock sold off overnight. This is that story.
For the three-month period ended November 2, Broadcom posted an adjusted EPS of $1.95 (GAAP EPS: $1.74) on revenue of $18.015 billion. These numbers easily beat Wall Street's expectations across the top line, the adjusted bottom line and the bottom line as reported. The sales print was good enough for year-over-year growth of 28.2%.
President and CEO Hock Tan commented in the press release:
"In Q4, record revenue of $18.0 billion grew 28% year-over-year, driven primarily by AI semiconductor revenue increasing 74% year-over-year. We see the momentum continuing in Q1 and expect AI semiconductor revenue to double year-over-year to $8.2 billion, driven by custom AI accelerators and Ethernet AI switches."
CFO Kirsten Spears added:
"In fiscal year 2025 adjusted EBITDA increased 35% year-over-year to a record $43.0 billion, and free cash flow was strong at $26.9 billion. Based on increased cash flows in fiscal year 2025, we are increasing our quarterly common stock dividend by 10% to $0.65 per share for fiscal year 2026."
Doesn't sound like the stuff of selloffs, does it? Even for a stock valued at 39 times forward looking earnings. Let's dig in, shall we?
Operations
As mentioned above, sales increased 28.2% to $18.015 billion. The total cost of that revenue including the amortization of acquisition-related intangibles grew 14.1% to $5.766 billion. This left a gross profit of $12.249 billion (+36.1%) on a gross margin of 68% (up from 67.1%). Total operating expenses, again including the amortization of the same intangibles, printed at $4.741 billion (+8.4%). That put GAAP operating income at $7.508 billion (+62.3%).
After accounting for interest, other income and expenses and taxes, GAAP net income hit the tape at $8.518 billion (+97%, not a misprint). That works out to $1.74 per fully diluted share, up from the year-ago comparison of $0.85. After adjusting primarily for the amortization of those acquisition-related intangibles as well as some stock-based compensation, net income grew 39% to $9.714B. That works out to $1.95 per fully diluted share, up from the year-ago comp of $1.42.
Segment Sales Performance
- Semiconductor Solutions generated revenue of $11.072 billion (+35%)
- Infrastructure Software generated revenue of $6.943 billion (+19%)
Guidance
For the current quarter, Broadcom guided total revenue generated towards a rough $19.1 billion. Wall Street had been looking for something closer to $18.3 billion. The firm also sees adjusted EBITDA at 67% of projected revenue.
Fundamentals
For the period reported, Broadcom generated operating cash flow of $7.703 billion (+37%). Out of that number came capex spending of $237 million. This left free cash flow of $7.466 billion (+36%). Out of that total, the firm paid out $2.797 billion in cash dividends to shareholders. Broadcom did not purchase any shares during the quarter.
Moving on to the balance sheet, Broadcom ended the quarter with a cash position of $16.178 billion and inventories of $2.27 billion. That took current assets to $31.573 billion. Current liabilities add up to $18.514 billion, including short-term debt of $3.152 billion. The firm's current and quick ratios stand at 1.71 and 1.58, respectively. These ratios are quite healthy.
Total assets amount to $171.092 billion. Goodwill and other intangibles total $130.074 billion or 76% of total assets. That's not just a lot. That's somewhat ridiculous. Total liabilities less equity comes to $89.8 billion. Of that number, $61.984 billion is labeled as long-term debt. While this is a hefty number, it is down 6.5% over 12 months so there is at least some effort being made to impose some discipline on the long-term outlook for the balance sheet. The current situation is fine.
The Call
This is where things went south for stock overnight. During the call, Broadcom emphasized revenue growth that is being driven by accelerating demand for AI-capable chips and infrastructure-building software. The result is a $73 billion AI backlog to be delivered over the next 18 months.
With continued investment in supply chain resilience, the company projects consolidated revenue of approximately $19.1 billion for Q1 2026 and expects demand for AI to remain the firm's growth engine. Management sees this increased demand as a multi-year opportunity, acknowledging margin pressure going forward despite the intention to maintain a disciplined approach to capital allocation and controlling operational costs. That expected margin pressure is what put the whammy on the shares.
My Thoughts
The business is growing nicely. Cash flows are robust. The balance sheet is improving. The firm has shown discipline across a number of metrics. I am impressed despite the expectation for some lower margins. Margins had been growing nicely coming in. This is a serious approach from management. I see Friday's lower prices as an opportunity to initiate.
Not a bad looking trend, is it? Obviously after the opening bell, both relative strength and the daily MACD will not look as bullish as they do here, but the trend will remain intact at least for now. I am a buyer down to the 50-day SMA (currently $362). It will be interesting to see what the swing crowd does at the 21-day EMA (currently $382).
My plan? I am not willing to add increased exposure to the semiconductor space. I am, however, willing to draw down my positions to some degree in both Nvidia (NVDA) and Intel (INTC) as I have nice gains in both.
Nvidia is my ninth-largest holding. It does not need to be in my top 10. Intel is not even in my top 15. I will not be reducing my exposure to Advanced Micro Devices (AMD) , which is my fifth-largest holding and has returned 87% over six months. Lisa Su is too cool.
In short, I expect to initiate AVGO as a long position on Friday morning.
At the time of publication, Guilfoyle was long NVDA, INTC and AMD equity.
