Broadcom Earnings Preview: Can AI Growth and VMware Integration Justify a $1 Trillion Valuation?

Earnings Preview: Can Broadcom Justify Its Sky-High Valuation?

Broadcom is set to report earnings after market close on Thursday, and the stakes are high. With shares up 85% year-to-date and recently hitting all-time highs, this company's performance will be closely watched. Its position as a top 10 holding in many exchange-traded funds means that the earnings report is likely to have a market-wide impact.

The key focus areas are growth in AI-related revenue and progress on integrating VMware, Broadcom's recent acquisition. Both will be crucial in assessing whether the company can sustain its elevated valuation.

Broadcom’s Position Among Tech Giants

Broadcom might not get as much attention as Tesla or Berkshire Hathaway, but it’s one of the few companies with a market cap exceeding $1 trillion. Despite this, many investors overlook it when thinking about the largest tech names. This earnings report will test if Broadcom’s recent surge is justified or if expectations have gotten ahead of reality.

What to Expect from Broadcom’s Earnings

Broadcom has been on a strong run lately, driven by semiconductor demand and investor excitement about AI infrastructure. The company has made significant strides in AI, particularly with custom AI chips and networking technology like the Tomahawk 6 switch, which offers 102.4 terabits per second of ethernet switching capacity.

Analysts expect AI-related revenue to grow by 42% year-over-year this quarter. The forward price-to-earnings ratio stands around 30x, reflecting high investor expectations. Most analysts have raised price targets to the $275-$295 range, suggesting optimism about Broadcom’s future.

The options market is pricing in a potential 6.5% move after the earnings call. Investors will focus on updates about AI revenue, VMware integration, and guidance for upcoming quarters.

Analyst Expectations

• EPS and Revenue: Analysts forecast earnings per share (EPS) of $1.57 and revenue of $14.97 billion, both showing strong year-over-year growth.
• Historical Performance: Broadcom has beaten EPS estimates in 9 of the last 10 quarters, setting a high bar this time.
• Segment Focus: The semiconductor segment, which typically makes up 75% of revenue, is expected to remain dominant.
• AI and Hyperscalers: Key clients include Alphabet and Meta, with expectations for further custom AI chip development.
• VMware Integration: The infrastructure software segment should see a boost, with VMware revenue estimated over $2 billion for the quarter.
• AI Revenue Guidance: Broadcom previously forecasted $10 billion in fiscal year AI-related revenue; any upward revision would be a positive signal.

What Could Move the Stock Post-Earnings

• AI Revenue Growth and Hyperscaler Partnerships: Investors will watch for confirmation of AI revenue reaching $4.42 billion, a 42% increase year-over-year and 7% sequentially.
• VMware Integration: Updates on the integration process and its impact on recurring revenue could sway investor sentiment.
• Enterprise Networking and Inventory: Enterprise networking faces inventory challenges, but improvements in the server storage business may offset some headwinds.
• Capital Allocation: Broadcom’s $10 billion share repurchase program signals confidence. Any commentary on buyback pace or dividend changes will be closely noted.
• Forward Guidance: Guidance aligned near $14.9 billion revenue for Q2 means any surprises here could significantly influence the stock.

Market Positioning Into Earnings

Broadcom is one of the top five semiconductor stocks with significant AI exposure, alongside Nvidia, AMD, Marvell Technology, and Arm Holdings. Its earnings outcome will be a key indicator of AI sector strength.

A strong report with raised guidance could trigger gains not only for Broadcom but also for other AI-heavy tech stocks and ETFs like XLK and QQQ. Conversely, a miss might prompt profit-taking after a significant rally.

The options market anticipates a 6%-7% move, slightly above Broadcom’s historical earnings week average of 4.5%-5%. Traders may look to use strategies like short straddles, iron condors, or debit spreads depending on their market view.

For IT and development professionals interested in how AI infrastructure providers like Broadcom shape the tech landscape, this earnings report is worth monitoring closely. For those looking to deepen their AI knowledge or skills to better understand these industry shifts, exploring specialized courses can be valuable. Check out Complete AI Training’s latest AI courses for practical learning options.