Will AVGO Stock Go Up?

Broadcom Inc (NASDAQ:AVGO) is a semiconductor and infrastructure brand that nearly tripled in price last year. Known for its aggressive acquisition strategy, the company was on a spending spree in the year leading up to the pandemic, buying Symantec’s consumer software segment.

It even tried buying rival Qualcomm (QCOM) before being hit with anticompetitive accusations in Europe.

While it snaps up a lot of other companies, is Broadcom stock a Buy?

The company’s biggest chipmaking client is Apple (AAPL), which has its own in-house semiconductor business bought from Intel (INTC). The $2 trillion tech giant accounts for about 20 percent of all Broadcom revenues and demand for new phones should continue to furnish it with new business.

But that’s just a small part of the company’s revenue streams. It’s a big player in telecom, data center, and cloud chips at the center of the race to 5G. It’s time to run the diagnostics on the company to determine if its returns on investment are up to speed.

Broadcom Is Acquisitive & Systemically Important

Broadcom is a prolific chipmaker that formed through the merger of Avago and Broadcom in 2016. It has since bought several other companies to expand into infrastructure hardware and software.

Still, 77 percent of the firm’s 2019 revenue came from wireless chips for a variety of industries. They’re used in telecom, data centers, and other industrial uses that provide high-speed wired and wireless networks.

On top of this, its infrastructure software is bundled into its silicon chips, generating the other quarter of its revenue. This gives it an advantage over other businesses down the line, like Cisco (CSCO) or IBM (IBM).

Although its main business is semiconductor chips, it doesn’t manufacture them. Instead, these are outsourced to chipmakers like TSMC. This saves the massive manufacturing costs and frees more capital for acquisitions and other expansion initiatives.

The company’s $117 billion merger with Qualcomm was blocked by President Donald Trump in 2017 over national security concerns. These concerns were assuaged when the company relocated its headquarters from Singapore to the U.S., but the story runs deeper.

A Qualcomm buyout could have given Huawei room to grow its 5G infrastructure footprint. U.S. officials worry about China-controlled global data networks.

So, is Broadcom a buy still?

Will AVGO Stock Go Up?

Broadcom Inc has fair market value that is a smidge under $500 per share according to an analysis of its cash flows forecast over time and discounted to present value.

Prices below that threshold ceiling would suggest there is still room for upside movement.

The company paid its quarterly cash dividend throughout the pandemic, even increasing it from $3.25 to $3.60 for its December payout. That equates to a healthy $14.40 per share annual payout, or a dividend yield of 3.33 percent.

Broadcom revenue grew 8 percent in 2019 and another 4 percent in 2020. Although global shutdowns disrupted its semiconductor business, infrastructure revenue grew, thanks to the Symantec enterprise security business it purchased the prior year.

Income rebounded by the second half of the year, thanks to the push for upgraded 5G and cloud infrastructure. As the world accelerates toward 5G mobility and more manufacturers offer compatible products, Broadcom should see a proportionate increase to its revenue streams.

It also grew free cash flow to $3.1 billion by the third quarter while holding $44 billion in debt stemming from its 2010s acquisitions. But its $13.9 billion in cash and cash reserves can easily keep that in check over the next few years. It will improve its credit rating in the process and likely buy more.

Will Apple Chip Business Hurt Broadcom Stock?

Broadcom holds a strong position in mobile chips, but the sustainability of its revenues aren’t a slam dunk. Apple accounted for 20 percent of the company’s bottom line in 2019. It placed an order for approximately $15 billion worth of wireless components over the next three years.

Apple is also working on its own in-house chips. It’s tired of paying licensing fees to companies like Qualcomm for its components and is working to streamline processes.

This could bottleneck the company’s long-term growth. Broadcom has to continue expanding into new markets and finding ways to make up for that potential lost revenue. And it will likely do so in the same way it arrived here in the first place – through acquisitions.

The company spends a lot of money acquiring technology companies to gain footholds into other markets. While this is a successful strategy, it’s soon going to run into competitors with deeper pockets. Should giants like Microsoft (MSFT), Google (GOOG), and Apple (AAPL) see it as a threat, they have more money to outspend it.

Broadcom could potentially end up being acquired itself if it continues taking market share from richer technology conglomerates.

AVGO Muscling In On Territory Of Titans

Broadcom has a lot of competition. Marvell (MRVL) and Intel (INTC) are among the wired infrastructure rivals, while Qualcomm (QCOM) and Skyworks Solutions (SWKS) compete with it in the wireless arena. And by pushing into software, it’s increasing its exposure to companies like Cisco and IBM, who famously make their money in the arena.

The tech industry is crowded, and no matter which way Broadcom grows, it’s going to run into stiff competition. And this is assuming the growth continues where it’s headed, which isn’t guaranteed when the economy reopens.

A return to normalcy for you could signal the downfall of companies like Broadcom, although it’s well positioned for the 5G revolution.

Will AVGO Stock Go Up? The Bottom Line

Broadcom is a semiconductor company that’s expanding into other aspects of enterprise infrastructure, including software. It grew through an aggressive mergers and acquisitions streak in the 2010s until it hit regulatory walls. Now it’s reaping the rewards of the push towards an ever more virtual world.

The company is heavily invested in 5G and a great investment for bulls of that market. It doesn’t have the capital tied up that a carrier like AT&T (T) or Verizon (VZ) does. But it also has a lot of debt on its books that it needs to reduce to keep investors satisfied long term.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.