Broadcom (AVGO): Tapping iPhone 16 Tailwinds, AI, Data Center, & NVIDIA Cycles for Strategic Long-Term Growth?

Broadcom's Q3 FY2024 results present a clear duality: robust AI-driven growth contrasted by continued non-AI market challenges. The company’s AI-related revenue forecast has been raised to $12 billion for FY2024, up from $11 billion, reflecting strong demand for custom AI accelerators and networking solutions. This growth tailwind aligns with broader semiconductor revenue, which is expected to hit $8 billion in Q4, marking a 9% year-on-year increase. However, the telco and industrial segments continue to underperform, with broadband sales down 49% YoY and industrial sales down 31% YoY. These declines are expected to persist into Q4, with broadband revenue projected to remain over 40% lower YoY due to spending slowdowns in the telco space. On the software front, VMware contributed $3.8 billion in Q3 revenue, with cost-saving initiatives and accelerated VMware Cloud Foundation bookings driving transformation. Broadcom aims to achieve $8.5 billion in adjusted EBITDA from VMware over the next three years, which will significantly enhance its long-term margin profile. Consolidated adjusted EBITDA is expected to account for 64% of Q4 revenue, driven by strong integration progress. FY2024 revenue guidance has also been raised to $51.5 billion, reflecting broad-based momentum. Nevertheless, non-AI segments, particularly server storage and networking, continue to struggle with year-on-year declines, emphasizing ongoing demand softness. Gross margins are expected to dip 100 bps sequentially, reflecting a heavier semiconductor mix. A notable bright spot is the iPhone 16 launch, with Wi-Fi 7 integration offering an incremental semiconductor tailwind. Broadcom’s ability to harness AI-related growth while managing recovery in non-AI markets will be pivotal in driving long-term performance. The successful integration of VMware and synergies, coupled with disciplined cost control, are critical levers for margin expansion. However, risks remain, particularly around further declines in telco and industrial demand, which could hinder recovery in non-AI segments. As Broadcom moves forward, the question remains: Can the company continue to balance its AI leadership and VMware integration while navigating persistent headwinds in non-AI markets? We delve into Major Drivers, Our perspective/thesis & follow up to our Initiation of Coverage :Earnings Review F3Q24, Forecasts,DCF, Valuation, Peer Analysis, ESG & Risks