Broadcom Inc (AVGO) NPV

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Broadcom reported first-quarter revenue of $19.3bn ($19.2bn expected), up 29% year-on-year, driven by continued strength in AI semiconductor solutions.

Underlying cash profit (EBITDA) increased 30% to $13.1bn ($12.7bn expected), with margins at 68%.

Free cash flow rose 33% to $8.0bn in the quarter, and the period ended with net debt of $52bn.

The Board approved a quarterly dividend of $0.65 per share and authorised a new $10bn share repurchase programme through December 31, 2026.

Second quarter revenue is expected around $22.0bn ($20.6bn expected), with an underlying cash profit margin of 68%.

The shares were up 5.3% in after-hours trading.

Our view

Broadcom’s first-quarter results were strong, driven by rising demand for AI chips, while the outlook and management’s commentary helped ease concerns around the demand trajectory. Orders are expected to build through the year, and the added colour on ramping deals for 2027 should act as a catalyst for earnings expectations to move higher.

Broadcom builds the essential chips and connectivity technology that move data around the world’s phones, networks, and data centres - helping power the digital infrastructure behind modern cloud, communications, and AI systems.

AI has quickly become the growth engine, where Broadcom takes a different approach than peers like NVIDIA or AMD. While those companies design general-purpose chips and solutions that can be sold off the shelf to run a wide range of AI workloads, Broadcom typically works with large tech firms to help build custom-designed AI chips tailored to their needs.

In these partnerships, the customer often leads the chip’s architecture, with Broadcom helping turn that design into a high-performance, manufacturable product and providing the networking technology that links thousands of chips together.

There is a raging debate about which approach is best. For now, the NVIDIA model has a massive scale advantage, but Broadcom’s custom chips are gaining serious traction. We don’t see it as one or the other; instead, we think there’s room for both to grow as the overall market expands.

We see two key risks, the first revolves around what NVIDIA does next. With the financial firepower to push deeper into the more niche areas of the chip market, we can see a path where Broadcom’s AI products face growing competition. There is also a chance that major buyers like Alphabet ditch the co-design playbook and go it alone – but we assign a low probability to both outcomes.

The financials are sound, and while there is a chunk of debt on the balance sheet from the VMware acquisition a couple of years ago, it's very manageable. If profits evolve as we expect, strong cash flows will leave plenty of room to pay down debt if needed.

We think Broadcom is well-positioned to capture a meaningful share of the growing custom AI chip market. Earnings expectations still look on the low side, and on our numbers, there’s strong profit growth and good upside on offer. There is also the added benefit of some diversification from peers, given its focus on bespoke chips. That said, a lot rides on future orders, and we see this as a higher risk name than others in the sector.

Environmental, social and governance (ESG) risk

The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly-specialised workers means labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.

According to Sustainalytics, Broadcom’s management of material ESG risks is strong.

Broadcom has no significant ongoing risk events. There is an ESG committee in place to oversee relevant issues, which is aligned with the Global Reporting Initiative standards. The 2024 responsibility report doesn’t clearly state whether it has a full diversity plan or a programme to monitor any gender pay gap, two elements that were covered in earlier reports.

The author holds shares in NVIDIA.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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