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Entrepreneur
Kurra Bewarse
Username: Entrepreneur

Post Number: 3392
Registered: 05-2011
Posted From: 65.35.45.47

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Posted on Friday, March 05, 2021 - 2:17 pm:   

AVGO Broadcom rings up strong results as iPhone 12 provides boost, but supply chain concerns linger (442.22 -1.37)

Heading into Broadcom's (AVGO) Q1 earnings report, one topic has dominated the semiconductor industry, creating plenty of angst among investors: namely, supply chain constraints and the possibility that customers are stockpiling chips, artificially inflating demand in the process. Competitor Marvell (MRVL) stoked these concerns on Wednesday, reporting mediocre quarterly results as CEO Matt Murphy also predicted that supply chain issues will persist at least through this year.

However, AVGO CEO Hock Tan sang a different tune during last night's earnings conference call, stating that the company has enough production from outsourced providers to meet demand. This remark is backed up by AVGO's strong quarterly results and guidance.

As anticipated, the wireless business cashed in on Apple's (AAPL) iPhone 12 launch. Typically, AVGO would reap the benefits from new device launches in Q4, but the delayed iPhone 12 launch pushed a substantial amount of wireless revenue out to Q1 this year.

Therefore, this quarter represented the seasonal peak for wireless with revenue surging by 52% yr/yr, essentially inline with AVGO's bullish forecast from last quarter.

Driven by solid demand from data center and cloud computing providers, business also remains healthy on the networking side. For the quarter, revenue increased by 15% with sustained momentum, reflected by an 80% jump in bookings.

Considering that this earnings season featured impressive quarterly reports from plenty of semiconductor companies (AMD, NVDA, MU, TXN, etc.), the upside report from AVGO didn't come as a surprise. Prior to this week's pull-back, the stock had rallied by 15% since its last earnings report, illustrating the positive sentiment.

The main uncertainty was whether the widely-documented supply constraints would weigh on AVGO's outlook. Easing those fears, the company issued better-than-expected guidance, forecasting Q2 revenue of $6.50 bln vs. the $6.33 bln consensus estimate.

Furthermore, Tan immediately addressed the supply chain issue during the earnings call, asserting that "our revenue reflects what's being consumed by end users." He supported the bold proclamation by shedding light on a rigorous process AVGO put in place last May. Specifically, the company consistently reviews its backlog and aligns its supply chain to better match end-user consumption.

Based on the stock's sluggish reaction to AVGO's beat-and-raise report, it seems that investors aren't completely sold on the positive supply chain assessment. A significant red flag that's gaining some attention is that industry lead times have risen to about 14 weeks. The lengthening of lead times suggests that customers are bulking up on orders to avoid supply shortages in the future.

Time will tell if a major supply glut materializes later this year, but many investors aren't keen on sticking around to find out. On the other hand, if Tan is correct, and end-user demand is authentic, then this recent dip in the stock looks like a buying opportunity.

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