Shares of Broadcom (AVGO) are lower in morning trading after the company's quarterly revenue missed analyst estimates and lowered its revenue for the fiscal year, saying it sees a "broad-based slowdown" in the demand environment. Following the report, other chip stocks fell in sympathy.
EARNINGS AND GUIDANCE: Though Broadcom's second quarter adjusted earnings per share of $5.21 beat the $5.18 analysts were expecting, its revenue for the quarter of $5.52B fell below the $5.68B consensus estimate. "We executed according to plan in the second quarter with tailwinds from networking offsetting the anticipated headwinds from wireless," President and Chief Executive Officer Hock Tan said in the quarterly report.
Looking ahead, Broadcom lowered its fiscal 2019 revenue view to $22.5B from $24.5B, well below the $24.41B analysts currently expect and lowered its capital expenditures view for the year to about $500M from $550M. In a statement, Chief Financial Officer Tom Krause said "We achieved record free cash flow of $2.5B growing 20% year over year in the second quarter. Despite the challenging market backdrop and updated revenue outlook, we still expect to grow free cash flow by a double-digit percentage for the year." He added that Broadcom remains focused on completing a total of $8B of share repurchases and eliminations this fiscal year.
'BROAD-BASED SLOWDOWN': In the earnings report, CEO Tan said "We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers." As a result, Tan said Broadcom's customers are "actively reducing their inventory levels," and that the company is taking a "conservative stance" for the remainder of the year.
Later on the company's earnings conference call, Tan said the environment is "very, very nervous." Broadcom now expects revenue for its semiconductor-solutions business, its biggest revenue-generator, to fall about 10% for the full year amid export bans on ongoing trade tensions and a ban on Huawei, one of its large customers. "In the second half, we had expected a recovery," Tan said on the call, but said that "With respect to semiconductors, it is clear that the U.S.-China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility for our global [original equipment manufacturer] customers."
ANALYST COMMENTARY: Following Broadcom's earnings report, several analysts lowered their respective price targets on the stock.
Barclays analyst Blayne Curtis lowered his price target for Broadcom to $315, but said he does not believe the "sky is falling" and that Broadcom's capital return story "keeps a bottom in the stock." BMO Capital analyst Ambrish Srivastava lowered his price target on Broadcom to $260 and kept his Market Perform rating after its Q2 results and a cut in its FY19 guidance, saying the company "did a u-turn" following a more bullish tone in the prior quarter. Srivastava added that the "hockey-stick" ramp expected in the second half and forecasted by many other semiconductor companies now looks like a "distant mirage" after Broadcom's "very negative" tone on fundamentals. KeyBanc analyst John Vinh lowered his price target for Broadcom to $310, saying that he believes the benefits of M&A will limit EPS downside in the current downturn and like the long-term opportunities in wireless and data center.
Morgan Stanley analyst Craig Hettenbach lowered his price target for Broadcom to $250, noting that Huawei is roughly a 4% customer, so the negative outlook is "above and beyond" the impact from just that company, said Hettenbach, whose negative near-term view on the business is balanced by the company's "industry leading margins." DA Davidson analyst Thomas Diffely lowered his price target on Broadcom to $300, saying he is also adopting a "more conservative" near-term stance, taking Huawei completely out of his model and cutting his FY20 EPS estimates to $24 from $26 per shares to reflect the continued China trade war and inventory digestion by key OEM customers. Jefferies analyst Mark Lipacis lowered his price target for Broadcom to $324 and said he expects an inventory restock in the second half of 2019 and view Broadcom's risk/reward as attractive. Craig-Hallum analyst Anthony Stoss lowered his price target to $315. He said he still expects Broadcom to benefit from content growth at Apple (AAPL) this year due to the socket win back from Qorvo (QRVO) and new content associated with Wi-Fi 6 and says he continues to like Broadcom's position at Apple longer term and notes its recently signed two-year supply agreement positions the company well for 5G inclusion in iPhones likely coming next year. SunTrust analyst William Stein lowered his price on Broadcom to $307 and said FY19 guidance "poured cold water" on the expected second-half of 2019 recovery in semiconductors.
Citi analyst Christopher Danely lowered his price target to $300, saying he believes the company's earnings are "close to a bottom."
Separately, CNBC's Jim Cramer tweeted that Broadcom's earnings call was "truly depressing" with a "solemn" Hock Tan.
PRICE ACTION: In morning trading, shares of Broadcom are down about 6% to $264.06.
OTHERS TO WATCH: Other publicly traded chip stocks in focus following Broadcom's report include AMD (AMD), Intel (INTC), Skyworks (SWKS), Xilinx (XLNX), Micron (MU), Nvidia (NVDA), Qualcomm (QCOM) and Texas Instruments (TXN).
Keywords: earnings, quarterly earnings, earnings report, analyst, commentary, Huawai, China, trade war, chip stocks