Broadcom Earnings Preview: Guidance On 2020 Chip Demand Will Be Crucial
Investing.com | Dec 11, 2019 12:47
* Reports Q4 2019 results on Thursday, Dec. 12, after the close
* Revenue expectation: $5.74 billion
* EPS expectation: $5.36
When Broadcom Inc (NASDAQ:AVGO) reports its fourth-quarter earnings tomorrow, investors can’t afford to ignore it. The San Jose, California-based chipmaker is considered a key barometer for the semiconductor industry due to its vast customer base and a diversified product line.
Broadcom’s earnings report will also be closely scrutinized to see whether the recent rally in chip stocks has any legs. The Philadelphia Semiconductor Index—which includes some of the world’s largest chipmakers, such as Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA) and Advanced Micro Devices Inc (NASDAQ:AMD)—has surged about 48% in 2019, far exceeding the S&P 500's 24% rise this year.
The rebound came amid optimism that the slowdown which hit the sector last year was short-term in nature despite the mixed signals from some of the largest producers.
Nvidia, the industry's biggest maker of chips for computer graphics cards, last month reported quarterly sales that topped analysts’ estimates, but the company offered a weak forecast, suggesting demand for gaming graphics chips is recovering slower than predicted.
Texas Instruments (NASDAQ:TXN) in October said “most markets weakened further,” in the third-quarter and gave a fourth-quarter revenue forecast that trailed the lowest estimate on Wall Street.
h2 Investors' Bullish Mood/h2These warnings have so far failed to temper investors’ bullish mood about semis. According to analysts’ consensus forecasts, the third quarter likely marked a bottom of the industry’s down cycle. Growth will then continue to accelerate. By the third quarter of 2020, semi earnings are expected to expand faster than software companies.
For the same reasons, Broadcom’s Q4 earnings report and conference call will come under intense scrutiny by investors, who are keen to know if the broad-based weakness that chipmakers were facing is over.
Another reason Broadcom's earnings are closely watched: the company derives almost half of its revenue from China, so its sales growth will provide some clues as to how the trade war between the U.S. and China is affecting its business. Huawei Technologies Co., which the U.S. government has blacklisted, purchases Broadcom switch chips that are a key component in the Chinese company’s networking gear.
Broadcom is also a major supplier of chips to Apple Inc (NASDAQ:AAPL), making its commentary on the wireless market’s demand outlook too important to ignore.
Chief Executive Officer Hock Tan has built a $100 billion company through a spate of acquisitions, including his purchase of part of Symantec Corp (NASDAQ:NLOK) for $10.7 billion in August.
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“We believe demand has bottomed out but will continue to remain at these levels due to the current uncertain environment,” Tan said in the earnings statement in September. There’s little visibility due to the trade war and no sense of a “sharp recovery around the corner,” he added on a conference call.
About half of the chips Broadcom sells are either used in China or sent through factories there on the way to becoming part of electronic devices sold around the world. Last year, Huawei accounted for about $900 million of Broadcom’s sales, Tan has said. Broadcom stock, which has gained 24% this year to close yesterday at $315.06, has been lagging the benchmark semiconductor index.
Bottom Line
The company's shares have shown some resilience through the recent sluggish period for chipmakers. In our view, the effects of the Huawei ban and macroeconomic risks are well reflected in the current price. Any improvement in U.S.-China trade relations, or a possible deal that also involves Huawei, would be a big plus for Broadcom. In the meantime, investors watching tomorrow's earnings announcement should also focus on the company’s view on 2020, cloud capex spending and smartphone unit trends.
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