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Broadcom Shares Fall as Revenue Outlook Misses Expectations

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Amid a deteriorating global economy, where consumer and enterprise spending is falling, AI has emerged as a bright spot for chipmakers. In the case of Broadcom (AVGO), a surge in sales is due to customers seeking to strengthen their networks to enable generative AI, popularized by the OpenAI chatbot ChatGPT and now used in Apple Inc (AAPL) iPhones. That is fueling what the company calls its “compute offload accelerated” business.

However, even as Broadcom sees a pickup in networking-related demand from leading cloud computing firms, the broader chip market downturn dampens growth prospects. Consequently, the company’s overall forecast came in below analysts’ expectations.

The San Jose, California-based company expects revenue of $9.27 billion in the fourth quarter, compared to a consensus of $8.88 billion, according to data from Refinitiv. The company’s semiconductor products are expected to account for 78% of that total, compared to the previous year’s figure of 69%. Broadcom’s infrastructure software segment, which includes its acquisition of VMware, is expected to contribute the remaining 22%.

While Broadcom’s chief executive, Hock Tan, says he remains hopeful about the long-term outlook for the company, he conceded that current market conditions are not ideal. “While we continue to believe that the industry is in the early stages of a cyclical recovery, our overall revenue outlook is cautious and reflects ongoing economic challenges, softness in key end markets, and increased competitive pressures in our core businesses,” he said in a statement.

He noted that a slowdown in traditional compute server demand is dampening growth at the chipmaker, while competition from companies like Nvidia Corp (NVDA.O) for networking chips is taking a toll on the company’s margin profile. In addition, he acknowledged that sales of Broadcom’s new networking products to suit AI-led workloads have yet to reach their full potential.

Moreover, the company’s exposure to consumer electronics markets, such as smartphones, is weakening. As a result, the company’s semiconductor unit saw growth decline to just 1% in the period, compared with 6% in the prior three months. That was mainly due to lower sales of high-end models from major smartphone vendors such as Apple and Samsung Electronics (KSSN.O).

Despite the gloomy outlook, Broadcom’s extensive portfolio of innovative products, technological leadership, and financial stability leave it well-positioned to harness value potential over the long term. As such, the company maintains a buy rating. Nevertheless, a technical analysis of the stock’s chart suggests that the stock may continue to slide in the short term. Consequently, investors are advised to use stop-loss orders and take profit at any signs of weakness. Shares of the company fell 3.4% in extended trading on Thursday. They have lost a steeper 22% this year, compared with the PHLX Semiconductor Index’s gain of nearly 45%. It is unclear whether the share pullback will accelerate or decrease, although the chart is getting uglier. A break below the 200-day moving average would be a bearish development and could lead to further selling pressures.

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