The Six Five Team discusses Broadcom Q3 2023 earnings.
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Transcript:
Patrick Moorhead: Yeah, it’s interesting. Broadcom does so well so often that anything other than a complete blowout quarter gets a complete yawn. If you look at the prior quarters where… It’s just amazing how consistent the company is. The prior three quarters beat by 1.75, 1.65, 1.64 on EPS and then on revenue beat by 0.3, one by 0.2, one beat by 0.34. Investors freaking love this consistency. They did come out with growth, 5% growth in both semiconductors and software, but Wall Street wasn’t that impressed this quarter. One thing about this is I look at these AI darlings and I put Broadcom in there, there has been a softening across all of those, whether it be Marvell, Broadcom, NVIDIA, and even AMD. In the stock, Broadcom has been up 56% in the past six months. What’s happening structurally inside of the business is that AI is growing leaps and bounds, but the traditional non-AI networking is not able to make up for that mega growth in AI.
And it’s amazing how many people don’t understand that. Sometimes I just wonder if investors actually understand stock or not. But then again, potentially the same themes that brought the stock up 56% in six months are the same ones that they’re finally understanding, hey, it’s not a one for one in all of Broadcom’s business if NVIDIA goes up. There’s a portion of Broadcom’s business that goes up when NVIDIA goes up.
Final thought on VMware, I think everybody’s waiting for this. It’s going to add just a huge element of dynamism to the company in terms of what they can do. The cash coming in, the $2 billion investment in the cloud is going to be exciting. I am expecting some divestitures and I think as we’ve seen in every type of acquisition, there’s going to be some overlaps, particularly around the OpEx side, I’m most excited about is the way that I think VMware is going to be run going into the future, which is going to be more like a startup as opposed to a giant monolithic software company.
Daniel Newman: Yeah, I think you hit some really good points there. Nobody quite knows how it’s going to run. There’s been departures within the executive ranks, the comings and goings. There’s been some talk about whether Hawk is going to take the VMware part of the business and become his central focus with Charlie running the traditional chip and semi, but Hawk’s also not one to… He’s a delegator. We know the GMs of his businesses and people have a certain opinion about Hawk, but one of the things is you got to know him, he really does entrust the leaders of the various business units to run those business units.
The Broadcom way… Avgo we should call it, in terms of its stock, A-V-G-O Broadcom, that one, I’ve always wondered why they didn’t change the ticker, but people would follow. Don’t worry, they’d get it. But anyways, huge margins. You look at most products up over 70%, huge earnings on every share, very large dividend on a per share… A very significant dividend. I don’t want to say very large because the shares are very expensive, but I’m saying for people who own, it’s a highly rewarding stock. But the behavior is really, it’s about profit maximization. He does what most companies should aspire to do and it’s sometimes scrutinized, but he invests heavily in the parts, pieces and products in the business that make money. When he acquires companies, he’ll shed and divest anything that doesn’t create revenue and profits.
You can be pretty sure that that’s going to happen with VMware. It’s a very safe guess to bet that there’s going to be some things that are going to get chopped off. He’ll find buyers for it. And by the way, that’s just the way it goes because what he’s going to do is look for the cash cows in the business. He’s going to maximize the cash cows and he’s going to get rid of the parts that don’t make a lot of sense. Most big companies, they tend to fund their pet projects and their loss-leaders by having a couple of cash cows. And then there’s Hawk and his style is, I only want cash cows. And that’s why the company performs so well. The company’s guidance, it was a little bit calm from what the market wanted. You said it really well, Pat, there were these AI darlings that were the first to be able to say we are going to be impacted by a tailwind of all this AI investment. That hasn’t changed.
But I think what a lot of people don’t realize is that this is going to happen in phases and that the investment is not all happening at one time. For instance, a company like a Broadcom though, you’re tucking pennies on the dollar for networking against every GPU that’s sold. That’s what some of the people were missing is they’re thinking, well, how much content from Broadcom gets sold with each one of these NVIDIA pieces? And then of course, NVIDIA’s got some competition within its own ranks. Some of these companies, if they’re all in with all NVIDIA networking, there may be very minimal content, but also it’s still there. But over time, as this scales to maximum proportions like traditional compute data centers, Broadcom is going to be riding that wave all the way through. I’m really interested, Pat, by the way, this is the quarter for the VMware deal. If it doesn’t close this quarter, it might not close. Having said that, my stance has not changed. This is the quarter it’s going to happen. But again-
Patrick Moorhead: Why would you think it might not happen? I’m just curious.
Daniel Newman: I think it’s going to want to be done. What I guess I’m saying is I think it is going to happen. Nothing has really changed, but I think Hawk was steadfast in having it happen this year. So, I think there will be some disappointment. There will be a very hard push to get it done this year.
By the way, one of the things you and I have learned is just the longer things do linger, the more likely they don’t happen. That is just the thing that’s happened with big deals. It’s the NXP deal with Qualcomm. It’s all eyes on Activision right now as it’s yo-yoed, to and from, of whether or not it’s going to pass. The more these things linger on, the more likely of scrutiny. At some point, a lot of these deals have… What do you call that? Poison pills in them where if they don’t happen by a certain date, there’s a breakup fee. And we’ve seen that happen as well. Again, I’m not familiar if there is one in this deal, but things do have to eventually close because, Pat, you and I know, having never done M&A at that level, but one of the things you do know is that M&M creates a lot of cultural uncertainty inside of businesses when it’s going on big deals, especially deals of this size.
You got to acknowledge, for Broadcom, it probably hasn’t created all that much. But for people at VMware, I guarantee you, the last six months, there’s been a lot of uncertainty, especially knowing that you’re moving between cultures that are so different.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
