Broadcom Earnings Preview: AVGO Stock Near Record Highs

Broadcom is set to report fiscal Q2 earnings on June 5, with analysts forecasting revenue of $14.98 billion (20% growth) and EPS of $1.57 (43% growth). Investors will focus on updates regarding Broadcom's custom AI chip business, particularly progress with new and existing clients like Alphabet and Meta, as well as the ongoing transition of VMware customers to a subscription model and any potential deals related to the end of the AI-Diffusion rule; the stock is near its all-time high, increasing the stakes for a positive earnings surprise.

Analysis

Broadcom is scheduled to report its fiscal Q2 2025 earnings on June 5, covering the three months ended April 30. Analyst consensus anticipates revenue of $14.98 billion, representing a 20% year-over-year growth, a deceleration from the nearly 25% growth reported in fiscal Q1. Adjusted earnings per share (EPS) are forecasted at $1.57, a 43% year-over-year increase, slightly down from the 45% growth in the previous quarter. While a moderate sequential dip in margins is expected compared to Q4, strong year-over-year margin expansion is anticipated to continue. Key focus areas for the earnings call include updates on the custom AI chip business, where Broadcom serves clients like Alphabet and Meta, and is engaging with four other large potential customers; the company projects AI revenue of $4.4 billion, a 44% growth. Progress on the VMware integration, specifically the transition of customers to a subscription model (60% last quarter) and the adoption of VMware Private AI Foundation (39 enterprise customers last quarter), will be critical, especially amidst reports of customer dissatisfaction with recent changes. The software segment is expected to report revenue of $6.5 billion, a 23% growth. The stock's valuation presents a heightened risk-reward profile, as shares closed near $249 on June 2, a 39% increase since the March earnings report and just below its all-time high, a level unprecedented for the stock heading into an earnings release. Despite this, analysts have recently upgraded price targets, with an average of $287, implying a 15% upside. Broadcom's report follows NVIDIA's strong earnings but contrasts with Marvell Technology's lackluster results, positioning AVGO's release as a significant indicator for the AI chip sector, particularly after its own stock surged nearly 9% post-Q1 earnings.

Key Decisions for Investors

• Investors should closely scrutinize management's commentary on the custom AI chip business, particularly any announcements of new customer engagements progressing to deals, as this is a pivotal growth catalyst.
• Monitor updates on VMware's customer transition to subscription models and any indications of customer attrition or satisfaction levels, given reported discontent, as this will impact the projected $6.5 billion software segment revenue.
• Given Broadcom's shares are trading near all-time highs, investors should be prepared for increased volatility and potential downside risk if earnings or forward guidance fall short of elevated expectations, despite recent analyst upgrades.
• Pay close attention to the outlook for AI revenue growth, expected at 44% to $4.4 billion, and overall margin trends, as sustained momentum in these areas is crucial to justify the current valuation.