What Should You Expect From Broadcom’s Q2 Earnings Report?

The outlook for AVGO stock looks good, but the specter of China still lingers

Broadcom (NASDAQ:AVGO) will deliver one of the more closely watched earnings report for this season on June 4. In the first quarter, the company posted $5.25 in earnings per share (EPS) on revenue of $5.85 billion. That was below the consensus estimate for $5.34 per share. What are the expectations for AVGO stock in the second quarter?

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Analysts are forecasting EPS of $5.14. In the company’s first-quarter earnings report, it forecast second-quarter revenue would be in a range between $5.55 billion and $5.85 billion. Analysts are currently calling for revenue of $5.7 billion, right in the middle of Broadcom’s guidance.

In addition to delivering earnings, Broadcom withdrew full-year guidance.

Broadcom Is More Than a Semiconductor Company

One thing that gets investors excited about Broadcom’s earnings is that the company is much more than a semiconductor company. And you can see why as you look more closely at the company’s first-quarter results.

Broadcom’s revenue was up 1%. Although over 75% of that revenue came from its semiconductors, that area of the business actually declined about 4%. But perhaps more importantly, the company’s infrastructure software business rose 19%.

Broadcom has made no secret about growing through acquisition. However, results like these prove that its strategy is beginning to pay off. The company is also seeing improved margins due to its software business. The company’s gross margin expanded over 10% in the quarter, and a reduction in operating expenses helped it raise its operating margin by nearly 3%.

Furthermore, it’s likely that Broadcom got 14% of its revenue from Apple (NASDAQ:AAPL). This would be part of its three-year agreement to provide Apple with $15 billion in wireless components.

Of course, past results do not ensure present performance. Broadcom does not forecast the novel coronavirus pandemic to have a significant negative affect on its business. However, CEO Hock Tan warned of a “possible” downside scenario that could cause Broadcom’s 2020 revenue to come in 5%-10% lower than its original forecast.

And although it seems like most companies have removed full-year guidance, analysts will still be looking for an update from Broadcom.

Broadcom’s Buyout of Symantec Closes the Loop

AVGO stock is up about 14% in the last month. A major catalyst was the highly anticipated buyout of Symantec, that is now finalized. Now, the remaining Symantec business trades as NortonLifeLock (NASDAQ:NLOK).

This was an important step in creating a closed loop of the company’s collection of products that allows it to connect devices, dive deeply into that connection and manage data. And now, it will be able to protect those connections. Cybersecurity will be one of the key sectors to watch in coming years.

Look for Broadcom to compete and win in that sector.

The Specter of China May Crimp AVGO Stock

For much of 2019, Broadcom was affected by its relationship with Huawei. The U.S.-China trade war brought American companies that do business with China under a harsh microscope. The federal government restricted Huawei’s access to components supplied by companies like Broadcom, Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC).

Prior to the recent escalation of tensions between the U.S. and China, those rules have not been strictly enforced. But the ongoing tech war over 5G is flying under the radar. Is this likely to derail Broadcom in the short term? Probably not. However, it’s something to watch out for.

Another note of caution for the stock comes from the average 12-month price target of $300.33. That suggests that the recent run-up in the stock may be close to running its course.

Both of these headwinds may make AVGO stock less attractive to growth investors. Value investors on the other hand should love the dividend. The company’s most recent dividend in March made it 10 consecutive years of dividend increases. And with a payout ratio that is just under 40% of the company’s cash flow, the dividend looks very secure.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/preview-for-avgo-stock-earnings-report/.

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