Zimele Mbanjwa
Broadcom Inc. is a global technology leader that designs, develops, and supplies a broad range of semiconductor, enterprise software, and security solutions. Broadcom's category-leading product portfolio serves critical markets including cloud, data centre, networking, broadband, wireless, storage, industrial and enterprise software. Solutions include service provider and enterprise networking and storage, mobile device and broadband connectivity, mainframe, cybersecurity, and private and hybrid cloud infrastructure.
The company, in its current form, is a result of a long history of mergers and acquisitions (M&A) of reputable technologically innovative companies.
Later notable deals included the 2017 failed unsolicited attempt to take over rival company, Qualcomm Inc for $117 billion. The deal was blocked by the Trump administration citing national security reasons given that Broadcom was based in Singapore at the time.
More recently, in November 2023, Broadcom completed the ~$86.3 billion acquisition of VMware, a leading innovator in enterprise software. The deal cemented Broadcom, which is largely known for its prowess in innovative hardware and semiconductor products, as one of the market leaders in enterprise software as well. As such, Broadcom's focus moving forward is to enable enterprise customers to create and modernise their private and hybrid cloud environments.
Operating Model
The company reports via two segments: Semiconductor Solutions and Infrastructure Software.
Semiconductor Solutions (58% of net sales) provides semiconductor solutions for managing the movement of data in data centre, service provider, and enterprise networking applications. Its product portfolio ranges from discrete devices to complex sub-systems that include multiple device types and may also incorporate firmware for interfacing between analogue and digital systems.
Infrastructure Software (42% of net sales) offers solutions that enable customers optionality on building, running, managing, connecting, and protecting applications and data at scale across various IT environments.
Competitive landscape
Given its diverse product and solutions range, Broadcom finds itself in competition with a variety of semiconductor and software companies, with market shares consistently shifting according to the pace of innovation amongst players. Indeed, competitors range from large international companies with wide offerings, to smaller companies that service niche markets. While Broadcom falls amongst the leaders of the semiconductor market with a continuous growing share, the intensity of competition is expected to continue to increase as existing competitors consolidate and continue to improve and enhance their product ranges and as new companies enter the market.
In the semiconductor market, Broadcom competes with integrated device manufacturers, fabless semiconductor companies, as well as the internal resources of large, integrated original equipment manufacturers (OEMs). Broadcom's right to compete in the semiconductor market stems from its strength and high-speed proprietary design expertise, its broad product portfolio, support of key industry standards, reputation for quality products, and customer relationships.
In the infrastructure software market, the group competes with large enterprise software vendors with broad product and service offerings, and smaller, niche players focused on specific markets. Broadcom's competitive advantage in this division comes from the breadth of its enterprise management tools portfolio, breadth and synergy of offerings, platform and hardware independence, global reach, deep customer relationships and industry experience.
Recent financial history
Over the previous five years, Broadcom has seen strong growth in key financial metrics driven mostly by strong secular tailwinds in the semiconductor space (mostly in recent times), which has seen the group invest heavily in research and development (R&D) and robust M&A activity post the Covid-19 pullback.
FY24 (ended 3 November 2024) was a strong year for the group, with revenue up 44% driven by a 7% increase in the semiconductor solutions segment thanks to strong demand for AI networking products, and an almost tripling of Infrastructure
Software revenue primarily due to contributions from recently integrated VMware. As such, subscription revenue increased to 41% of total revenue (FY23: 22%), which bodes well for increased predictability of income and cashflow generation going forward.
Adjusted EBITDA grew 37% to a record $32 billion, but growth was less than revenue, which translated into the margin shrinking to 50% (FY23: 57.6%). This was a function of increased compensation costs related to higher headcount from the VMware merger, a higher mix of AI XPUs (auxiliary processing units), and increased investment in R&D. Profitability improved as the VMware merger was bedded down and in 4Q24, adjusted EBITDA increased 50% and the margin came in at 65%.
Broadcom's cashflow generation was robust, with free cash flow increasing 10% to $19.4 billion, remaining supportive of returns to shareholders, with the total dividend for the year increasing 12% to a record $2.36 per share (a 14th consecutive increase). In all, during the year, Broadcom returned $22.2 billion to shareholders ($9.8 billion in cash dividends and $12.4 billion in share repurchases).
Outlook
Management is expecting revenue to increase ~22% y/y to $14.60 billion in 1Q25 driven by a 65% growth in AI revenue, partly offset by non-AI semiconductor revenue which is guided to be down in the mid-teens y/y. The consolidated gross margin will be up 100 basis points q/q on higher revenue mix of infrastructure software and product mix.
Long term, the group expects growth to be driven by the AI semiconductor business, which is expected to rapidly outgrow the non-AI semiconductor business. The group expects a $60 billion to $90 billion AI revenue serviceable addressable market (SAM) by 2027, with Broadcom set to exceed revenues of $30 billion in this space by 2027, driven mostly by AI XPU deployment by the group's hyper-scale customers. In addition to its already existing three hyperscalers (large cloud service providers like AWS, Microsoft Azure and Google Cloud), which can provide services such as computing and storage at enterprise scale, the company recently announced its that it has been selected by two additional hyperscalers and is in advanced development for their own next-generation AI XPUs. The new prospects are expected to be revenue-generating customers before 2027 and could therefore significantly enhance the SAM.
Investment Case
Risks
Consensus outlook
Valuation
Broadcom's share price has had quite the run since mid-2022 and is currently trading at a premium relative to its long-term average and at a premium to peers (where it has historically traded at a discount). Our outlook is still positive, but we would be more comfortable investing in the stock at a less demanding multiple. This means that either the price must come down, or the earnings outlook must improve even further.
