Broadcom Shares Up 8% Following Q2 Earnings; Morgan Stanley Reiterates Overweight

Broadcom Ltd AVGO reported its first quarterly results as a combined entity with Avago. Shares jumped following higher-than-expected results and guidance. Morgan Stanley’s Craig Hettenbach maintained an Overweight rating for the company, while raising the price target from $182 to $191.

What’s Working For The Company

Broadcom reported an EPS beat of 6 percent for the quarter, and also raised guidance by 6 percent. Analyst Craig Hettenbach noted that strength in networking, helped by new product ramps, has enabled the company to meet revenue expectations in recent quarters, despite weakness in wireless and storage.

Broadcom is also benefiting from an improving mix, resulting in gross margin expansion. Moreover, the company is in “the early innings” of its $750mn in cost savings target from the merger. “Net, net this helps sustain our conviction in Broadcom's ability to drive outsized EPS growth, where we model a 20% CAGR, more than 2X the 9% rate for peers,” Hettenbach wrote.

During the earnings call, management indicated increasing $ content in the wireless connectivity business. Avago is witnessing new opportunities in premium smartphones to drive higher content in connectivity.

Management also indicated that it was addressing supply constraints in 25G. “We continue to view Broadcom as a primary beneficiary of hyperscale data center builds, leveraging its dominant market share of 80%- 90% in merchant silicon,” the analyst stated.