Broadcom Pre-earnings Analysis
Broadcom shares are trading near all-time highs ahead of the company’s final quarterly earnings report for the year. 2024 has been a remarkable year for the company, with revenue growth of 34%, 43%, and 47% in the first three quarters, respectively. These strong results have set Broadcom on track to achieve its most successful year ever. However, as the earnings release approaches, investors remain cautious about key challenges, particularly the company’s profit margins.
Despite robust revenue growth, Broadcom's net income has taken a significant hit this year, dipping into negative territory last quarter due to higher expenses tied to its 2023 acquisition of VMware. This decline in profitability has driven the company’s price-to-earnings (P/E) ratio to an eye-watering 149x—well above the typical healthy range of 15-25. The company’s valuation has also surged past $800 billion, a stark contrast to its projected annual revenue of $50 billion.
While investors may be willing to tolerate temporary losses stemming from the VMware acquisition, the inflated stock price is harder to ignore. Broadcom’s upcoming earnings report is pivotal. To sustain its momentum, the company must not only exceed expectations but also deliver optimistic guidance for the year ahead. If Broadcom can replicate its revenue growth from 2024 while showing a clear path to improved net income, it could trigger an earnings breakout. Conversely, another quarter of losses and disappointing guidance might prompt a sharp correction.
Option chain analysis:
The option’s market is currently reflection an implied volatility reading of about 108% on AVGO’s December 20th contracts. That translates to a (+/-) $12 move, the direction depends on the earnings outcome.