Broadcom’s ‘excellent backlog management’ earns Wall Street’s trust as other chip makers struggle


Broadcom Inc. isn’t like other chip companies — and that showed in Friday’s analyst reports, which cast the chip and software maker as an outlier of consistency in a turbulent semiconductor market.

Last quarter, Broadcom said it had about $31 billion in product backlog with lead times of 50 weeks. It declined to update that figure Thursday, indicating that it had omitted any 2023 outlook on purpose and did not want an updated backlog figure treated as an outlook.

Broadcom Chief Executive Hock Tan refused to budge on the analyst call on Thursday, reiterating that he saw 2023 as a growth year and that all orders for the year had already been booked. What sets Broadcom apart from other chip makers, however, is how it manages sales of its product.

Other chip makers like Nvidia Corp.

have had to cut outlooks repeatedly this year, after a two-year global chip shortage triggered by the pandemic quickly flipped to signs of a glut. As happened in 2019, chip sales again fell off after a big run as chip buyers double- and triple-bought chips they needed in order to lock in prices. That appears to be the case this time around as well, although the hoarding was due more to short supply that resulted from the logistical nightmares caused by the pandemic as well as by the war in Ukraine, China’s COVID shutdowns and a looming recession.

Read: Nvidia’s mixed earnings spark optimism: It’s ‘easier to suggest that the bottom for numbers is likely in’

Broadcom differs from its peers in that Tan has two policies: no order cancellations, and sales only to customers who demonstrate that they are not hoarding chips. Essentially, Tan has shown that this process is working and is asking Wall Street to trust in the black box that is producing results.

After analysts filed their reports, however, Reuters on Friday reported that Broadcom’s bid to acquire VMware faces a full-on antitrust probe in the European Union, according to unidentified sources close to the matter. When asked for comment on the report, a spokesman for Broadcom referred MarketWatch to Tan’s comments during Thursday’s conference call and to the EU’s competition policy docket.

The company said it expects to close its $61 billion purchase of VMware Inc.

within the fiscal year, which ends in October. VMware would be a big addition to Broadcom’s software holdings, which also include Symantec’s enterprise security business and CA Inc. 

Late Thursday, Tan told analysts that the company was “making progress with our various regulatory filings around the world” and that it had already received clearance in Brazil, Canada and South Africa.

“We anticipate the timeline for the review process would be more extended in other key regions, especially given the size of this transaction,” Tan said.

Shares of Broadcom rose as much as 4% to an intraday high of $552.64, and were last up 3%, while the S&P 500
the tech-heavy Nasdaq
and the PHLX Semiconductor Index

 were all down about 0.3%.

Also read: Cloud software is a ‘fight for a knife in the mud,’ and Wall Street is souring on the one sector that was winning

In a note titled, “In Hock We Trust (Yet Again),” Evercore ISI analyst C.J. Muse, who has an outperform rating and a $650 price target, wrote that Thursday’s report demonstrated “excellent backlog management.”

“Management noted that Hyperscale spending, Enterprise consumption, and Broadband deployment patterns all remain strong in spite of signs elsewhere across the industry that spending is beginning to moderate in response to elevated inventory levels and macro concerns,” Muse wrote. “We believe this is reflective in no small part [of] Broadcom’s very strong execution in managing its backlog to ensure it is only shipping to customers that have an immediate consumption need.”

Cowen analyst Matthew Ramsay, who raised his price target to $555 from $540, said, “We remain impressed by the continued strong execution across Semis Solutions segments, particularly given the choppy enterprise/storage backdrop, amplified by recurring revenue contributions from Infrastructure Software.”

He continued: “While providing necessary and consistent sources of high-margin revenue diversification in a tough environment, we continue to struggle to see the Semi and Software synergies in the long term. As such, we maintain our Market Perform rating as we believe risk/reward is balanced at current levels.”

Jefferies analyst Mark Lipacis, who has a buy rating and hiked his price target to $650 from $565, said Broadcom is showing strong product cycles in resilient infrastructure end markets as other companies deal with high inventory.

“We think exposure to durable strategic infrastructure spending, careful under-shipping of orders, new product gens, content gain ramps, and critical portfolio breadth will continue to help counteract market volatility,” Lipacis said.

Of the 24 analysts who cover Broadcom, 21 have buy-grade ratings and three have hold ratings. Of those, four raised their price targets and four lowered theirs, resulting in an average target price of $653.71, up from a previous $652.88.

Year to date, shares of Broadcom have declined 18%, while the S&P 500 has fallen 17%, the Nasdaq has shed 29%, and the SOX index has dropped 30%.

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