Broadcom

Chipmaker Broadcom Posts Strong Earnings Despite Weak Enterprise Demand; Target Price $456

Chipmaker and software infrastructure supplier Broadcom reported better-than-expected earnings in the last quarter of the fiscal year 2020, largely driven by solid demand for networking and wireless products but warned that its enterprise demand remained weak.

The semiconductor manufacturer said its non-GAAP diluted earnings per share came in at $6.35 on revenue of $6.47 billion, a surge of 12% year-over-year, beating Wall Street estimate of $6.25 per share on revenue of $6.43 billion.

The global semiconductor leader forecasts first-quarter revenue of nearly $6.6 billion and adjusted EBITDA of about $3.9 billion, or 59% of projected revenue.

“Broadcom (AVGO) beat and raised based on continued strength in networking and broadband and expected ramp in wireless. AVGO expects 50% YY growth in wireless with seasonal peak January quarter,” said Mark Lipacis, equity analyst at Jefferies.

“Semiconductor, Broadband, and Industrial are all expected to grow at least double digits YY. The dividend yield of 3.5% is highest in our coverage universe, and we think it provides downside support to the stock. Reiterate Buy,” Lipacis added.

Broadcom’s shares dipped 1.47% to $404 in pre-market trading on Friday. However, the stock is up about 30% so far this year.

Executive Comments

“Despite the challenges presented by the ongoing pandemic and macroeconomic uncertainties, we achieved record profitability, generating $11.6 billion of free cash flow in fiscal 2020,” said Tom Krause, CFO of Broadcom Inc.

“As a result, we are raising our target common stock dividend by 11% to $3.60 per share per quarter for the fiscal year 2021,” Krause added.

Broadcom Stock Price Forecast

Twelve equity analysts forecast the average price in 12 months at $456.36 with a high forecast of $490.00 and a low forecast of $400.00. The average price target represents an 11.30% increase from the last price of $410.04. From those 12 analysts, ten rated “Buy”, two rated “Hold” and none “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $495 with a high of $588 under a bull-case scenario and $351 under the worst-case scenario. The firm currently has an “Overweight” rating on the semiconductor manufacturer’s stock.

“We increased our price target from $440 to $495, reflecting higher estimates and rolling forward to 2022. Our target multiple of 19X (including stock-based comp) is unchanged and represents a considerable discount to large-cap semis like Texas Instruments and Qualcomm trading at mid to upper 20s P/E multiples, which could prove unwarranted. At the same time, this is a tricky part of the cycle for Broadcom and the semi industry. Notably, supply chain tightness and extending lead times could lead to inventory accumulation, which will need to be monitored closely in 2021,” said Craig Hettenbach, equity analyst at Morgan Stanley.

Several other analysts have also upgraded their stock outlook. Bernstein raised the stock price forecast to $450 from $400; Rosenblatt Securities raised the target price to $470 from $430; Deutsche Bank upped the price objective to $475 from $450; Truist Securities increased the target price to $464 from $411; Mizuho raised the stock price forecast to $460 from $425.

In addition, Jefferies upgraded the price objective to $470 from $420; JP Morgan upped the price target to $500 from $420; RBC raised the target price to $450 from $410; Cowen and Company increased the stock target forecast to $415 from $350; Piper Sandler upped the target price to $440 from $400.

Analyst Comments

“We are ‘Overweight’ on Broadcom (AVGO) and expect a reversal in stock performance after meaningfully lagging the past 2 years. While sentiment on the CA deal has gradually improved, investors are negative on the Symantec acquisition. This creates a low bar, and we think AVGO will be able to execute on synergies and wring out value in Symantec,” Morgan Stanley’s Weiss.

“We are more positive than investors on the 3 key segments of endpoint, DLP and web proxy. If AVGO is able to execute in software it would add to what we view as a very compelling franchise in semis (65% weighted market share across 50% of revenue in duopoly structures), creating a diversified, highly profitable and cash generative business.”

Upside and Downside Risks

Risks to Upside: 1) Broadcom executes successfully on its software strategy. 2) New product cycles in cloud. 3) The company’s valuation multiple re-rates after lagging semis over the past few years – highlighted by Morgan Stanley.

Risks to Downside: 1) Customer concentration in wireless. 2) Execution on the Symantec acquisition. 3) High levels of debt, with net leverage of ~3X.

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