Broadcom secures a major contract worth billions; will strong expectations support the stock price's upward trend?

Last Friday $Broadcom(AVGO.US)$ released its Q3 performance, with an unexpected performance that spurred the stock price to surge nearly 10%. As the absolute leader in the communications chip sector, Broadcom has demonstrated a strong stock performance this year, outshining NVIDIA.

What highlights from this performance are worth noting? What trading opportunities lie ahead? This week, let’s discuss the key takeaways from the performance report!

1. Revenue Growth

First, looking at the company’s overall revenue, Q3 revenue reached $15.952 billion, a year-on-year increase of 22%, surpassing general expectations. The two core businesses: semiconductors and infrastructure software contributed 57% and 43% of the revenue, respectively.

Focusing specifically on the semiconductor business, which contributed the most, Q3 revenue was $9.166 billion, with a year-on-year growth rate of 26%, achieving continuous growth for 10 consecutive quarters.

The accelerated growth of the semiconductor business is primarily driven by contributions from AI services. This quarter, AI business revenue was $5.2 billion, with a year-on-year growth rate of 63%, with custom AI chip XPU's order revenue being the largest contributor, including orders from three major clients, whose market share is also increasing, suggesting a better outlook for 2026.

Currently $Broadcom(AVGO.US)$ Broadcom has a total of seven major client resources, among which one client has issued a large order worth tens of billions for customized AI chips. It is rumored that this mysterious major client is OpenAI, with deliveries expected to begin in the second half of the fiscal year 2026. This news can be regarded as the most explosive stock price catalyst of this financial quarter, releasing a positive signal to the market regarding Broadcom's future performance.

In addition, another core business—revenue from infrastructure software reached $6.786 billion, a year-on-year increase of 17%. Although the growth rate has slowed compared to fiscal year 2024, it has significantly benefited from the acquisition of VMware, resulting in substantial incremental growth. Currently, VMware's growth performance remains stable, and it has launched VMware Cloud Foundation 9.0, a fully integrated cloud platform that provides enterprises with a true alternative to public cloud solutions.

In summary, the strong growth of AI and VMware has contributed to Broadcom's high growth rate and the positive guidance for the fourth quarter.

2. Profitability

Broadcom's profitability ranks among the leaders in the entire semiconductor industry.

From various indicators, the company's gross margin has steadily remained above 60%. The GAAP net margin has also recovered to around 30% since the acquisition of VMware, with this quarter's net profit at $4.14 billion, marking a fundamental turnaround compared to the same period last year.

Looking at the adjusted EBITDA, this quarter's profit is $10.702 billion, with a profit margin of 67.1%, higher than the previous quarter. Additionally, Broadcom has provided guidance for the next quarter, forecasting that the EBITDA profit margin will remain around 67%, which we can closely monitor for changes.

3. Inventory Situation

Based on the cyclical characteristics inherent in the semiconductor industry, the company's inventory level is also an important observation indicator. Broadcom's inventory/revenue ratio has long remained between 10% and 20%, which is considered very low within the industry. Particularly in recent quarters, Broadcom's inventory/revenue ratio has shown an overall declining trend, maintaining a low level of around 13%, further demonstrating the company's capabilities in inventory management.

In the upcoming performance reports, we can continue to monitor the trend of Broadcom's inventory/revenue ratio to see if it can remain at historically low levels.

4. Cash Flow and Shareholder Returns

As one of the giants in the semiconductor industry, Broadcom holds significant power within the supply chain, with minimal cash tied up in inventory and accounts receivable. Consequently, its cash flow level is quite strong, with this quarter's free cash flow reaching a record $7 billion.

Broadcom's robust cash flow is primarily utilized for investments and acquisitions, as well as for shareholder returns, with cash dividends amounting to $2.8 billion this quarter. Therefore, Broadcom is one of the rare dividend aristocrats among tech stocks, not only ranking high in terms of dividend yield compared to its peers, but also having dividends and buybacks over the past five years exceeding the company's net profits, demonstrating a generous approach to shareholder returns.

5. Stock Price Performance

Observing the stock price trend since the low in April this year, Broadcom has achieved a cumulative increase of 99%, significantly outperforming the market.

The stock price trend reflects, on one hand, the company's status as a beneficiary in the AI sector, with market recognition of Broadcom's capabilities in custom AI chips and AI infrastructure; on the other hand, it indicates that the company is accelerating its growth, with promising prospects for the future.

From a technical perspective, stimulated by performance, Broadcom's stock price maintains a strong upward trend and is likely to continue reaching new highs. Investors should pay attention to the EMA50 trendline support level; if there is a pullback towards this moving average in the future, it would represent a relatively reliable entry point.

For risk-tolerant fellow investors, it may also be worth considering the use of options to achieve high returns with a small investment. If the outlook for Broadcom remains positive, the following options strategies can be considered:

1. Bull Call Spread: If you remain bullish but do not want to incur excessive costs or take on high risk.

Strategy: "Buy Call A" + "Sell Call B", with the strike price of Call A < the strike price of Call B. If the underlying stock rises, selling Call B at a higher strike price limits maximum profit, while if the stock falls, the maximum loss is limited.

2. Covered Call: You already own the stock and are willing to forgo some upside gains to obtain downside protection.

Strategy: Hold the underlying stock and sell out-of-the-money calls; the maximum gain is the stock price rising to the strike price + premium, while the maximum risk involves losses from a decline in stock price, theoretically the stock price could fall to zero.

3. Long Call: If you anticipate significant short-term increases and have a high risk tolerance.

Strategy: Directly buy call options; the theoretical maximum profit is unlimited, while the maximum risk is the loss of the premium.

4. Short Put: Believing that the stock price will consolidate or rise moderately in the short term.

Strategy: Sell out-of-the-money put options, with a maximum profit equal to the premium received and a maximum risk being the purchase of the underlying asset at the strike price. If the loss on the underlying stock exceeds the option premium, the overall strategy will incur a loss.

For more options strategies, please refer to this.Options Course

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Risk Disclosure: This content does not constitute a research report and is for reference only. It should not be used as the basis for any investment decision. The information provided herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of the information are believed to be reliable, the accuracy or completeness of the content is not guaranteed. Additionally, no assurance is given as to the accuracy of any statements, views, or forecasts provided in this document.