Broadcom results to provide clear insight into trade war impact
Wall Street was feeling pretty good about Broadcom Inc. in mid-March as its semiconductor business appeared to be turning the corner and Chief Executive Officer Hock Tan saw “meaningful growth” in the second half of the year.
A lot has changed since then.
Trade relations between the U.S. and China have soured. One of Broadcom’s biggest customers was banned from buying American components. Spending on data centers has remained sluggish. So the big question on analysts’ minds heading into Thursday’s post-market earnings report is whether Tan’s prediction for the latter part of 2019 remains intact.
In the past four weeks, the average analyst estimate for third-quarter revenue fell by about $50 million to $6.1 billion, while expectations for adjusted profit fell by 5 cents to $5.71 a share, according to data compiled by Bloomberg. With the stock down 13% from an April 17 record, some on Wall Street see potential for the stock to rally as expectations have fallen.
“We view AVGO shares as attractive ahead of earnings given what appears to be lower expectations and our belief that the company’s longer-term growth and profitability prospects remain solid,” MKM Partners analyst Ruben Roy wrote in a research note on Monday, referring to Broadcom by its ticker symbol.
The San Jose, California-based company’s products and global customer base make its results a key indicator for how trade tensions are affecting the semiconductor industry. Almost half of Broadcom’s revenue last year was linked to China. Huawei Technologies Co., which the U.S. government is blacklisting, purchases Broadcom switch chips that are a key component of the Chinese company’s networking gear.
Broadcom is also a major supplier of chips to Apple Inc. and recently signed an agreement with the iPhone maker to extend that relationship. Analysts and investors use the chipmaker’s commentary on the wireless market to get a window into demand in the smartphone market.
Bank of America analysts led by Vivek Arya reiterated their buy rating on Broadcom on Monday, saying the effects of the Huawei ban and macroeconomic risks are “well expected.”
“Key focus will be commentary on second half recovery, cloud capex spending and smartphone unit trends,” they wrote in a research note.
The earnings release is due after the close of trading Thursday. Broadcom options prices imply a 7% move in the shares, compared with an average 4.5% over the past eight reports, according to data compiled by Bloomberg.
Just the Numbers
- 2Q adjusted EPS from continuing operations estimate $5.15 (range $4.73 to $5.46)
- 2Q adjusted net revenue estimate $5.67 billion (range $5.45 billion to $5.91 billion)
- 2Q adjusted gross margin estimate 70.6% 2Q semiconductor solutions revenue estimate $4.28 billion
- 2Q infrastructure software revenue estimate $1.36 billion
- 3Q adjusted net revenue estimate $6.11 billion (range $5.80 billion to $6.30 billion)
- 3Q adjusted gross margin estimate 69.6%
- FY adjusted net revenue estimate $24.31 billion (range $23.68 billion to $24.70 billion); forecast $24.5 billion
- 26 buys, 12 holds, 0 sells
- Avg PT $320.20 (14.2% upside from current price)
- Implied 1-day share move following earnings: 7.0%
- Shares rose after 8 of prior 12 earnings announcements
- Adjusted EPS beat estimates in 12 of past 12 quarters
- Quarter dividend BDVD est. $2.65 per share, year ago reported $1.75; next declaration date June 13, 2019
- Earnings release expected June 13 after market close
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