Tech Bubble? AVGO's Results Show It's Anything But (SOXX, AVGO)

SOXX

149.65

Created with Highstock 4.2.6

AVGO

254.53

Created with Highstock 4.2.6

SWKS

108.42

Created with Highstock 4.2.6

QRVO

78.95

Created with Highstock 4.2.6

Bubble? What Bubble? There is a reason why the semiconductor space is on fire in 2017, and it isn't because there is a bubble brewing. The iShares PHLX Semiconductor ETF (SOXX

) is up nearly 57% over the past year. With stocks like Broadcom Limited (AVGO ) up about nearly 56%, Skyworks Solutions Inc. (SWKS ) up about 62%, and Qrovo Inc. (QRVO ) up almost 56%. To say the sector has been on fire is likely an understatement, but today Broadcom showed once again how the performance is so well deserved in its latest quarterly results.

 

AVGO data by YCharts

For the most recent quarter, Broadcom reported Non-GAAP revenue grew by 18% to $4.201 billion from $3.562 billion last year. Gross margins for the quarter increased by 310 bps y/y to 63.1%. Non-GAAP net income grew to $1.666 billion from $1.120 billion last year, resulting in Non-GAAP diluted EPS of 3.69. Analysts had been looking for the company to report revenue of $4.109 billion, and EPS of $3.50, leading to a crushing beat on the top and bottom.

If that wasn't enough, Broadcom issued Non-GAAP revenue in a range of $4.450 billion at the mid-point, analysts had been looking for revenue of $4.265 billion. The company also noted it is anticipating end markets to remain healthy. (For more, see also: Why the Tech Bubble Won't Burst Soon: Analysis.)

The results today for Broadcom gives us a very positive read through for the rest of the sector. It tells us the end users for which Broadcom supplies parts to is strong, and the company has enough visibility to give strong guidance for the coming quarter. It also tells us it is likely the other suppliers are likely to see the same benefits. In the end, it will result in rising analyst revenue and EPS estimates for the coming quarters.

AVGO Quarterly Revenue Estimates data by YCharts

All of these estimates will likely be taken higher across the sector after the results Broadcom provided. For Broadcom, the results also demonstrate that the company has an excellent command of its cost controls. The gross margins for the third quarter are expected to be 63% at the mid-point, which would be in line with the current quarter sequentially.

The semi stocks for the most part are up tremendous amounts over the past year, and if the rest of the group's next round of quarterly results resemble the result of Broadcom's latest, there will be plenty of more run for these stocks to run even further.

AVGO PE Ratio (Forward 1y) data by YCharts

Throw in PE multiples for some stocks that are trading in the mid-teens; it shows us just how much room there is to run. As the analysts raise EPS estimates, the stocks will become cheaper on valuation metrics, implying the space can get further stock price appreciation without the multiple expansion.

Bubble? The results Broadcom posted are a sign there is anything but a bubble in the sector. The stocks in the sector are going up on organic growth prospects, and if you are investors in the Semi space, it is something worth getting excited about.

Michael Kramer and the clients of Mott Capital Management LLC own shares of SWKS.

Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser