Broadcom AI Gains Overshadowed by Broader Sales Slowdown

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

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Semiconductor revenue from companies building out their AI capabilities could grow to $1 billion per quarter, Broadcom Chief Executive Officer Hock Tan said during a quarterly earnings call Thursday. AI-related chip sales could be more than 25% of the company’s total soon, he said.

But total revenue is expected to rise less than 5% to about $8.85 billion this quarter, the company said in an earlier statement. While that would top the analyst estimate of $8.76 billion, it represents Broadcom’s slowest increase in years. The company is contending with a industrywide slump in tech demand, and its growth has decelerated sharply from a pandemic-fueled surge.

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

Though Tan’s remarks about AI sent the shares into a brief after-market rally Thursday, they slipped back down to a decline about 2.3% late in the day.

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

Excitement about Broadcom’s growth prospects helped send its shares up 41% this year through Thursday’s close, making them one of the best-performing semiconductor stocks in 2023.

After that buildup, Broadcom’s report failed to impress investors — even though the numbers topped Wall Street estimates.

In the second quarter, which ended April 30, Broadcom’s profit was $10.32 a share, excluding some items. Revenue rose 7.8% to $8.73 billion, marking the first time the growth has been below 10% since 2020. Analysts had predicted earnings of $10.15 a share and sales of $8.72 billion.

Broadcom’s chip business had sales of $6.81 billion in the quarter, a gain of 9% from a year ago. Infrastructure software rose 3% to $1.93 billion.

Tan had warned analysts and investors that Broadcom’s growth during pandemic boom times wouldn’t last. The shortages of the past few years have given way to an inventory glut in some areas, prompting customers to put off new orders. The company still expects to have full order books for the rest of the fiscal year, which ends in October.

Broadcom’s chips go into smartphones and home networking — in addition to data centers — making it a bellwether for a wide swath of tech spending. The company supplies semiconductors to Apple Inc. for the iPhone that provide short-range connectivity. The chipmaker had warned earlier that wireless sales would slow in the second quarter.

Broadcom, based in San Jose, California, also has branched out into enterprise software by acquiring security and mainframe capabilities. A planned purchase of cloud software maker VMware Inc., though, is facing regulatory scrutiny and has taken longer than expected to close. That company also posted quarterly results after the close on Thursday, reporting sales and earnings missed estimates.

Broadcom said it’s making good progress clearing regulatory hurdles and still expects the VMware deal to be completed in fiscal 2023.

Tan is more downbeat 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 has said.

It’s hard to tell if AI will change that outlook, he said Thursday, because the deployment of AI systems is limited to a small group of cloud-computing companies. Computing systems also are hard to build out quickly because of the supplies involved.

It takes six months to deliver leading-edge components, he said.

“You don’t make it in anything less than six months,” he said. “The ability to ramp-up will be more measured.”

(Updates share reaction in fifth paragraph.)

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