Broadcom gives an upbeat outlook citing data center demand

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(Bloomberg) — Broadcom Inc. chief executive officer Hock Tan on Thursday gave an upbeat outlook on the chip industry, saying demand from enterprise customers is “on fire,” though he warned gains won’t last forever.

Data center owners and telecom service providers are investing heavily in new technologies, he said after the quarterly results were released. Broadcom said current-quarter sales will grow faster than analysts were expecting, which will help its shares soar as much as 4.8% in late trade.

But unlike some of his peers in the $550 billion chip industry, Tan doesn’t think current levels of growth are sustainable. Demand for Broadcom’s electronic components rose about 20% last year and is on track for a similar increase in 2022, but ultimately the industry will slow to historic rates of about 5%, he said.

“If anyone tells you otherwise, don’t believe it because it never happened,” he said on a conference call. He said those who claim the semiconductor industry can grow at current rates for an extended period of time are “dreaming”.

Many other leaders are willing to believe in that brighter future. CEOs like Pat Gelsinger of Intel Corp. have cited predictions that the industry will double in size over the next decade, driven by the proliferation of chips across a broader range of products.

Industry sales soared 26% in 2021, sparking debate over whether the surge in demand was just a harbinger of a downturn. Investors have turned more pessimistic and have penalized chip stocks this year. Broadcom is down 13% in 2022 through Thursday’s close, in line with the Philadelphia Stock Exchange’s semiconductor index.

With that in mind, Broadcom’s guidance came as a pleasant surprise to investors. The company said revenue for the fiscal second quarter will be approximately $7.9 billion, beating the median analyst estimate of $7.41 billion.

For the fiscal first quarter ended Jan. 30, Broadcom’s earnings rose to $8.39 per share excluding some special items. Revenue rose 16% to $7.71 billion. Analysts had forecast earnings of $8.13 per share on sales of $7.6 billion.

Broadcom’s products are integral parts of a wide range of technologies and its customer list includes many of the world’s largest companies. This makes his forecasts a guiding star for the chip industry and the economy as a whole.

Some of the biggest spenders in technology — so-called hyperscalers, like Alphabet Inc.’s Google — use Broadcom’s network chips in their data centers. Apple Inc. also uses Broadcom chips in the iPhone to connect to Wi-Fi networks and peripherals.

Chipmakers have benefited from rising demand, but have also had to deal with problems and supply chain bottlenecks that have held back production from smartphones to vehicles. Tan has said the company has as many orders as it can fill for the remainder of this year and into part of 2023.

Tan was more open and proactive than some colleagues when it came to addressing bottlenecks. He told customers he needed orders well ahead of normal to ensure supplies. Tan also implemented a no-cancellation policy and intentionally didn’t accept orders when Broadcom felt device makers were charging more than they needed.

He has cited those policies and a lack of inventory as evidence that the chip industry will not suffer from a supply glut. Tan reiterated his belief that there are no stocks. The company ships chips that go immediately into sold products and are not stored in warehouses.

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