Broadcom revenue beats estimates as AI powers demand, investors still unimpressed

(Reuters) – Tech conglomerate Broadcom beat market estimates for first-quarter revenue on Thursday, as cloud providers continue to upgrade data centers to support AI, helping drive demand for its advanced networking chips.

However, smaller rival Marvell Technology forecast revenue below market expectations, sending its stock down 6% in extended trading.

Broadcom did not update its annual revenue forecast of $50 billion, which falls just shy of expectations, likely disappointing investors. The company expects nearly a fifth of annual revenue to come from AI, CEO Hock Tan said on a post-earnings call.

A 26% rally in Broadcom’s stock in 2024, fueled largely by AI optimism, has come with high growth expectations for the Palo Alto, California-based company. The stock dipped more than 1% in after-hours trading.

Marvell and Broadcom sell technology providing fast communication between high-end computers, and the two have been viewed on Wall Street as big potential winners from the explosive growth in AI computing.

Ahead of their results, Broadcom and Marvell each rallied over 4%, both hitting record highs having surged in recent months.

Broadcom has been hailed as a beneficiary of a generative AI push across the tech landscape which has prompted firms to increase spending on infrastructure, pushing demand for their chips which allow different parts of large cloud companies’ systems to communicate with one another.

Complex data centers, which are involved in the development of generative AI, are obsolete without networking gear from providers such as Broadcom to support them. This has successfully embedded Broadcom in supply chains, making it one of the larger beneficiaries of AI.

AI revenue quadrupled from a year earlier to $2.3 billion during the quarter, more than offsetting the current cyclical slowdown in enterprise and telcos, Tan added.

Revenue from its semiconductor solutions segment ticked up 4% to $7.39 billion for the first quarter, just shy of the Visible Alpha estimates of $7.45 billion.

Broadcom expects to cash in nearly $10 billion in AI revenue in its semiconductor segment in 2024, Tan said.

“While investors might be disappointed that management did not raise its outlook, we think there remains upside possibility in spite of the weaker macro environment and weaker carrier and enterprise demand,” said Summit Insights analyst Kinngai Chan.

But for competitor Marvell, its results cast a shadow of doubt over investors’ hopes of revenue generated from AI buoying it past estimates, amid slumping demand from telecom enterprises.

SOFTWARE SEGMENT GROWTH

While widely known as a chipmaker, Broadcom’s portfolio has now widened to include various tech firms such as VMware and software company CA technologies.

Infrastructure software revenue grew 153% to $4.57 billion, which was ahead of Visible Alpha estimates of $4.49 billion.

Broadcom is also known for its custom chips, hailed among the leaders of the ASICs (application specific integrated circuit) market.

ASICS refer to semiconductors that can be altered according to a customer’s preferences, contrary to general purpose chips such as those sold by Nvidia.

Broadcom’s first-quarter networking revenue growth of 46% was largely driven by demand for custom AI chips from two hyperscale customers, Tan said, without naming the clients.

The company is largely acknowledged as the chipmaker behind tech giant Alphabet’s Google tensor processing units (TPUs)- custom chips that power some of its cloud services.

Alphabet saw capital expenditure shoot up 45% in the fourth quarter in 2023, as it invested heavily in expanding its AI offerings. Meanwhile, Meta Platforms had paid about $500 million to Broadcom last year, according to a February filing.

The company reported quarterly net revenue of $11.96 billion, above analysts’ average estimate of $11.72 billion, according to LSEG data.

Broadcom reported adjusted first-quarter net income of $5.25 billion, compared with analysts’ estimates of $5.01 billion. Adjusted for stock compensation, among other things, earnings were $10.99 a share, compared with estimates of $10.30 a share.

(This story has been corrected to reflect that Broadcom beat revenue estimates, in paragraph 22)

(Reporting by Arsheeya Bajwa in Bengaluru and Max A. Cherney in San Francisco; Editing by Krishna Chandra Eluri and Diane Craft)