Shares of Broadcom (NASDAQ: AVGO) took a dip by 10.4% on Friday as the semiconductor and infrastructure software maker released its third-quarter report for fiscal 2024. The decline can be attributed to lower-than-expected guidance for fourth-quarter revenue. In the current landscape of artificial intelligence (AI) stocks, simply meeting or slightly beating Wall Street estimates is often not enough to satisfy investors. Broadcom must exceed projections to maintain a positive outlook.

Investors expressed some dissatisfaction with Broadcom's Q3 results, despite the fact that both the top and bottom lines surpassed analyst consensus estimates, albeit by a narrow margin. The broader market dynamics also played a role in the decline, with major indexes taking a hit due to a weak jobs report for August.

Broadcom's revenue growth was primarily fueled by its acquisition of VMware in November 2023. Excluding the contribution from this acquisition, revenue grew by just 4% year over year. The company's adjusted numbers for operating and net income should be the main focus for investors, although GAAP numbers should also be taken into consideration. The GAAP net loss was impacted by a one-time non-cash tax provision related to an intra-group transfer of certain intellectual property rights.

In terms of financials, Broadcom generated cash of $4.96 billion from its operations in the quarter – a 5% increase compared to the previous year. Free cash flow stood at $4.79 billion, which accounted for 37% of revenue and represented a 4% YoY increase. Excluding restructuring and the integration of VMware, FCF reached $5.3 billion, up 14% from the previous year. The company finished the quarter with cash and cash equivalents of $10 billion and long-term debt of $66.8 billion.

While Broadcom did not explicitly disclose the total revenue generated from AI-related products, CEO Hock Tan stated on the earnings call that he expected sequential growth of 10% to over $3.5 billion for Q4 AI revenue. This implies that Q3 AI revenue was roughly $3.1 billion to $3.2 billion, accounting for about 24% of total revenue.

Breaking down the segment performance, the growth in the infrastructure software segment was primarily driven by the VMware acquisition, with a focus on virtualization and cloud services. In the semiconductor segment, networking revenue saw a significant YoY increase of 43% to $4 billion, driven by strong demand for AI networking and custom AI accelerators. Non-AI networking revenue declined YoY but showed a sequential growth of 17%, indicating a potential bottoming-out. Custom AI accelerator revenue experienced a remarkable three-and-a-half times YoY growth.

Looking ahead to the fiscal fourth quarter ending on November 3, management forecasts revenue of $14 billion, implying a year-over-year growth of 51%. Adjusted EBITDA is expected to be 64% of projected revenue, slightly higher than the previous quarter's 63%. Despite falling short of analysts' revenue expectations for Q4, Broadcom raised its outlook for AI product revenue for the year to $12 billion.

In conclusion, Broadcom's revenue growth is heavily reliant on the demand for its AI products, particularly Ethernet networking products and custom AI chips. While the non-AI business continues to face challenges, some segments show signs of improvement. Notably, the contribution from the VMware acquisition has been a crucial factor in driving revenue growth, as organic growth has only reached 4% YoY.

Investors are urged to carefully consider Broadcom's current position before making any investment decisions. While the company's Q3 results and guidance fell short of expectations, the long-term potential of AI-related products may still provide promising opportunities.

Please note that the information in this article is sourced from Broadcom's report for the third quarter of fiscal 2024 and may not fully reflect the current situation.