Broadcom AI gains overshadowed by slowing sales

(Bloomberg) — Broadcom Inc. predicted that sales tied to artificial intelligence will double this year, a sign that it is benefiting from the same frenzy that propelled Nvidia Corp., but the chipmaker remains mired in a broader downturn.

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Semiconductor revenue from companies developing their AI capabilities could grow to $1 billion a quarter, Broadcom CEO Hock Tan said during a quarterly conference call on Thursday. AI-related chip sales could make up more than 25% of the company’s total soon, he said.

But total revenue is expected to rise by less than 5% to about $8.85 billion this quarter, the company said in an earlier statement. While that tops analysts’ estimate of $8.76 billion, it represents Broadcom’s slowest increase in years. The company is facing an industry-wide slump in technology demand, and its growth has slowed sharply due to a spike caused by the pandemic.

In touting Broadcom’s AI gains, Tan is using a tactic now commonplace for tech companies. But like others, he still hasn’t matched the dramatic increase that his colleague Jensen Huang at Nvidia is seeing. Broadcom may be growing in a weakened overall market, but Nvidia predicted a jump in sales of more than 60%.

While Tan’s comments about the AI ​​sent the stock into a brief post-market rally on Thursday, they fell to a decline of around 2.3% by the end of the day.

Broadcom’s networking components help route traffic between computers in giant data centers and it manufactures custom chips for some of the largest cloud computing providers. Those customers are racing to add more capacity to handle the demand for AI services — a trend that helped Nvidia near the $1 trillion valuation threshold this week.

Excitement over Broadcom’s growth prospects has helped lift its stock 41% this year through Thursday’s close, making it one of the best performing semiconductor stocks in 2023.

After that buildup, Broadcom’s report failed to impress investors – although the numbers beat Wall Street’s estimates.

For the second quarter, ended April 30, Broadcom’s earnings were $10.32 per share, excluding certain items. Revenue rose 7.8% to $8.73 billion, marking the first time growth has stayed below 10% since 2020. Analysts had forecast earnings of $10.15 per share and sales of $8. 72 billion.

Broadcom’s chip business had sales of $6.81 billion for the quarter, up 9% from a year earlier. Infrastructure software increased 3% to $1.93 billion.

Tan had warned analysts and investors that Broadcom’s growth during the boom times of the pandemic would not last. Shortages in recent years have given way to overstocking in some areas, causing customers to postpone new orders. The company still expects to have full order books for the remainder of the fiscal year, which ends in October.

Broadcom’s chips go into smartphones and home networks – as well as data centers – making it a beacon for a wide swath of technology spending. The company supplies semiconductors to Apple Inc. for the iPhone that provide short-range connectivity. The chipmaker had previously warned that wireless sales would slow in the second quarter.

Broadcom, headquartered in San Jose, Calif., has also branched out into enterprise software by acquiring security and mainframe capabilities. A planned buyout of cloud software maker VMware Inc., however, is facing regulatory scrutiny and has taken longer than expected to close. That company also released quarterly results after Thursday’s close, reporting sales and earnings below estimates.

Broadcom said it is making good progress clearing regulatory hurdles and still expects the VMware deal to close in fiscal 2023.

Tan is more pessimistic about the overall semiconductor industry than many of his peers. In the long run, the market probably won’t grow much faster than the US gross domestic product, he said.

Whether AI will change that outlook is hard to say, he said Thursday, because deployment of AI systems is limited to a small group of cloud computing companies. Computing systems are also difficult to build quickly because of the supplies involved.

It takes six months to deliver high-end components, he said.

“You don’t get that in less than six months,” he said. “The ramp-up capacity will be more measured.”

(Updates share reaction in fifth paragraph.)

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