Broadcom Stock Slips 4% as Earnings Only Slightly Beat Wall Street's Estimate Despite Strong AI Chip Sales
Shares of Broadcom (NASDAQ: AVGO) declined 4% in Thursday's after-hours trading, following the semiconductor and infrastructure software maker's release of its report for the second quarter of fiscal year 2025 (ended May 4).
Broadcom's second-quarter earnings edged by Wall Street's expectation and revenue was in line with the consensus estimate. Third-quarter revenue guidance essentially met the Street's expectation.
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So why did Broadcom stock modestly decline following the release? It comes down to failing to meet investors' high expectations.
Broadcom stock had surged 86% over the last year through Thursday's regular trading session, and it's priced at 40 times forward projected earnings. The stock's big run-up and its relatively pricey valuation reflect that investors have very high expectations. (As to the valuation, Nvidia stock's forward price-to-earnings (P/E) ratio is lower at 32.4, and its earnings are growing at a faster pace than Broadcom's.) So, simply meeting or barely beating Wall Street's estimates wasn't good enough for many investors.
Image source: Getty Images.
Broadcom's key numbers
| Metric | Fiscal Q2 2024 | Fiscal Q2 2025 | Change YOY |
|---|---|---|---|
| Revenue | $12.49 billion | $15.00 billion | 20% |
| GAAP operating income | $2.97 billion | $5.83 billion | 96%* |
| Adjusted operating income | $7.15 billion | $9.79 billion | 37%* |
| GAAP net income | $2.12 billion | $4.97 billion | 134% |
| Adjusted net income | $5.39 billion | $7.79 billion | 44% |
| GAAP earnings per share (EPS) | $0.44 | $1.03 | 134%* |
| Adjusted EPS | $1.10 | $1.58 | 44%* |
Data source: Broadcom. *Calculations by author. YOY = year over year. GAAP = generally accepted accounting principles. Fiscal Q2 2025 ended May 4.
Investors should focus mainly on the adjusted numbers for operating and net income, which exclude one-time items.
Wall Street was looking for adjusted EPS of $1.57 on revenue of $14.96 billion, so Broadcom edged by the profit expectation and essentially met the top-line estimate. It also slightly surpassed its own revenue guidance of $14.9 billion. And it also edged by its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) outlook of 66% of revenue, as this profitability metric was 67%. The company does not provide earnings guidance.
In the quarter, Broadcom generated cash of $6.56 billion running its operations, up 43% from the year-ago period. It generated free cash flow (FCF) of $6.41 billion, or 43% of revenue, up 44% year over year.
It ended the quarter with cash and cash equivalents of $9.47 billion, up 2% from the prior quarter, and long-term debt of $61.8 billion.
Segment performance
| Segment | Fiscal Q2 2025 Revenue | Change YOY |
|---|---|---|
| Semiconductor solutions | $8.41 billion | 17% |
| Infrastructure software | $6.60 billion | 25% |
| Total | $15.00 billion | 20% |
Data source: Broadcom. YOY = year over year.
The semiconductor solutions segment's revenue growth was driven by continued strong demand for Broadcom's products for artificial intelligence (AI) data centers, including custom AI chips and Ethernet networking products. The custom chips are ASICs, or application-specific integrated circuits.
The company's "AI revenue grew 46% year over year to over $4.4 billion," CEO Hock Tan said in the earnings release. Strength in the AI chip business was offset by continued weakness in the company's chips for end markets other than AI. Within the AI revenue, "custom AI accelerators grew double digits year on year, while AI networking grew over 70% year on year," Tan said on the earnings call.
The infrastructure software segment's revenue growth was driven by continued strength in the VMware business. Broadcom acquired VMware in November 2023.
Fiscal third-quarter guidance
For Q3 2025 (which ends early August), management expects:
- Revenue of $15.8 billion, which equates to growth of 21% year over year.
- Adjusted EBITDA of at least 66% of projected revenue. For context, in the just-reported Q2, this profitability metric was 67%.
Going into the report, Wall Street had been modeling for Q3 revenue of $15.77 billion, so the company's revenue outlook was essentially in line with this expectation.
In Q3, "we forecast AI semiconductor revenue to be $5.1 billion, up 60% year on year, which would be the tenth consecutive quarter of growth," Tan said on the earnings call.
In short, Broadcom turned in another robust AI-driven quarter highlighted by adjusted EPS and free cash flow both surging 44% year over year.
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Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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