Broadcom - To Outperform Through 2023
We expect Broadcom to continue outperforming the peer group in 2023, driven by new products with higher ASP. See why we continue to be bullish on AVGO stock.
Broadcom - To Outperform Through 2023
Summary
- We continue to be bullish on Broadcom after the company’s beat on top and bottom lines in 1Q23.
- We expect AVGO to continue outperforming the peer group in 2023, driven by new products with higher ASP.
- AVGO Management has exercised good discipline in not shipping double orders from its customers, hence avoiding the need for customer inventory correction impacting so many of its peers.
- AVGO, however, is not immune to the weaker spending environment into 2023.
- We believe AVGO stock continues to present a favorable risk-reward profile to longer-term investors.
We remain buy-rated on Broadcom (NASDAQ:AVGO) post-earning results for the first quarter of 2023. We expect AVGO to continue outperforming the peer group this year, driven by its new products with higher ASP. We’re also constructive on how management has handled the double-ordering issue; the company’s exercising discipline in not shipping most of the customers’ double orders has shielded AVGO from the need for inventory correction.
We upgraded the stock after its 4Q22 earning results late last year; since then, the stock is up a little over 17%. Our bullish sentiment hasn’t changed much; we expect the company to outperform, driven by a higher ASP. We believe the recent 1Q23 earning results reflect that AVGO is successfully boosting revenue through this strategy, and we expect this to continue in 2023.
The following graph shows our rating history on AVGO.
We believe AVGO is an attractive investment, even if the semi-space does not rebound meaningfully in terms of unit volume growth in 1H23. We’re focusing on being bullish on semi-stocks that we expect to provide a favorable-risk reward profile even if macroeconomic headwinds persist toward the end of the year. While AVGO has both software/hardware and semiconductor solutions, it’s more exposed to the semi-space through its wide range of chips for data centers, wireless, networking, storage, broadband, and industrial markets. We also expect the semi-space to rebound at a faster pace than the software/hardware side of tech over the next year; hence, we’re more constructive on AVGO benefiting from the semi-space rebound as it derives around 80% of its revenues from its semiconductor solutions. The following table outlines AVGO’s revenue by segment in 1Q23.
Still, AVGO is not immune to weaker spending and macroeconomic headwinds. In the first half of this year, we expect the higher ASP for newer products to offset the weaker spending environment impacting cloud spending. Yet, we believe AVGO’s financial outperformance will moderate somewhat as we go through 2023 due to the weaker spending, but we still expect it to outperform its peer group. We remain bullish on AVGO and recommend investors buy the stock at current levels.
Outperforming in 2023 & What to expect
AVGO’s 1Q23 earning results show growth driven by higher ASP for new products and expect this to growth pattern to continue through 2023. AVGO beat both top and bottom lines in 1Q23, reporting revenue of $8.92B, a 15.7% Y/Y increase, and non-GAAP EPS of $10.33, a beat of $0.17. AVGO is not immune to the weak spending environment pressuring cloud spending and causing enterprise customers to be more stingy with budgets. Canalys forecasts the worldwide cloud service spend to grow 23% in 2023 compared to 29% in 2022. Our bullish sentiment on AVGO is based on its strategy to expand its silicon, software, and hardware storage connectivity products and boost growth through increased ASP on new products. AVGO just announced its first 5nm 100G/lane Optical PAM-4 DSP PHY that provides superior performance and efficiency for hyperscale data centers and cloud providers. Our last note also discussed AVGO upgrading its Tomahawk 5 Ethernet Switch Series. We believe new products will arm AVGO with the power to increase ASP on new products to boost revenues and make up for softer demand.
AVGO has outperformed the peer group, PHLX Semiconductor Sector, and S&P 500 Indices. The following graph outlines AVGO’s outperformance compared to the peer group and semi-indices over the past year.
Additionally, we believe AVGO has partially outperformed the peer group because of its successful maneuver of double-ordering issues. Others in the semi-space, including NVIDIA (NVDA), Texas Instruments (TXN), and Marvell (MRVL), have suffered due to double-ordering, which inflated demand expectations and necessitated inventory correction. AVGO has exercised discipline in not shipping out double-orders from its customers. Hence, we don’t see double-ordering being an issue for AVGO going forward.
Valuation
AVGO is relatively cheap on a P/E basis, trading at 15.2x C2023 EPS $41.71 compared to the peer group average of 21.9x. The stock is trading at 8.1x EV/C2023 Sales versus the peer group average of 5.3x. We believe AVGO stock provides a favorable risk-reward profile in the mid-to-long term and recommend investors buy the stock.
The following table outlines AVGO’s valuation.
Word on Wall Street
Wall Street shares our bullish sentiment on the stock. Of the 26 analysts covering the stock, 21 are buy-rated, and the remaining are hold-rated. We believe AVGO is well-positioned to outperform the peer group even if it doesn’t necessarily rebound in unit volume growth in 1H23.
The following table outlines AVGO’s sell-side ratings.
What to do with the stock
We continue to be bullish on AVGO. The company’s 1Q23 earning results were a solid indicator that AVGO can and will continue to offset the weaker spending environment with new products with higher ASP. We’re not too concerned about the risk of double-ordering as AVGO is doing well to shield itself by restraining shipping most customers’ double orders. We believe AVGO is a healthy stock in the semi-space amid market uncertainty. We expect the company to see moderating outperformance towards the end of the year but still outperform the peer group. We recommend investors buy the stock at current levels.
This article was written by
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Comments (23)
> "AVGO has exercised discipline in not shipping out double-orders from its customers." <
Does the above sentence mean AVGO refused to fill orders from customers if AVGO judged the order to be too large?