Broadcom (NASDAQ:AVGO) Posts Better-Than-Expected Sales In Q1, Inventory Levels Improve

Fabless chip and software maker Broadcom (NASDAQ:AVGO) reported Q1 FY2024 results beating Wall Street analysts' expectations, with revenue up 34.2% year on year to $11.96 billion. The company expects the full year's revenue to be around $50 billion, in line with analysts' estimates. It made a non-GAAP profit of $10.99 per share, improving from its profit of $10.33 per share in the same quarter last year.

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Broadcom (AVGO) Q1 FY2024 Highlights:

• Revenue: $11.96 billion vs analyst estimates of $11.72 billion (2.1% beat)
• EPS (non-GAAP): $10.99 vs analyst estimates of $10.42 (5.4% beat)
• The company reconfirmed its revenue guidance for the full year of $50 billion at the midpoint
• Free Cash Flow of $4.69 billion, similar to the previous quarter
• Inventory Days Outstanding: 38, down from 71 in the previous quarter
• Gross Margin (GAAP): 61.7%, down from 73.4% in the same quarter last year
• Market Capitalization: $625.6 billion

Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ:AVGO) is a semiconductor conglomerate that spans wireless, networking, data storage, and industrial end markets along with an infrastructure software business focused on mainframes and cybersecurity.

Processors and Graphics ChipsThe biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales GrowthBroadcom's revenue growth over the last three years has been mediocre, averaging 16.4% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $8.92 billion in the same quarter last year to $11.96 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Broadcom had a strong quarter as its revenue grew 34.2% year on year, topping analysts' estimates by 2.1%.

Product Demand & Outstanding InventoryDays Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Broadcom's DIO came in at 38, which is 24 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Key Takeaways from Broadcom's Q1 Results We were impressed by Broadcom's strong improvement in inventory levels. We were also excited its revenue and EPS outperformed Wall Street's estimates. On the other hand, its gross margin significantly fell, raising a yellow flag (although not perfect comparisons, Nvidia (NASDAQ:NVDA) saw a big increase in its gross margin while AMD (NASDAQ:AMD) and Qualcomm (NASDAQ:QCOM)'s were flat). Looking ahead, its full-year 2024 revenue and EPS were in line with estimates. We think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was likely expecting more, and the stock is down 3.3% after reporting, trading at $1,358 per share.