Broadcom Inc: Upside Ahead, Even Without the SAS Acquisition
Often stocks are in the news for what turns out not to be any news at all. This recently happened to Broadcom (AVGO), when the Wall Street Journal reported that Broadcom was in talks to acquire SAS Institute, which is the largest privately held software services provider. In a recent article, Anusuya Lahiri, a Nobias 4-star rated analyst who writes for Bezinga, broke down the WSJ story, saying that AVGO appeared to be attempting to “double down on enterprise software”.
Lahiri noted that “A deal, which would value SAS in the range of $15 billion- $20 billion, could be finalized in the coming weeks.” And, she stated that as of May 2, 2021, Broadcom held $9.5 billion of cash and cash equivalents, which meant that the company could easily make such a deal.
AVGO shares jumped some 4% on this news when it broke in mid-July. The market obviously liked the idea of this chip maker continuing to diversify its revenue stream into the software-as-a-service (SaaS) industry because SaaS sales tend to result in higher margins, more predictable cash flows (oftentimes, SaaS sales are recurring and subscription based), and ultimately, higher multiples on earnings which results in higher share prices. However, after the WSJ report was published, it didn’t take long for SAS Institute's management team to squash the rumors. The very next day, another WSJ article was published saying that the deal was off.
Cara Lombardo authored that piece and she wrote, “Talks for Broadcom Inc. to buy SAS Institute Inc. have ended after the founders of the closely held software company changed their minds about a sale, people familiar with the matter said.” AVGO shares gave back their short-term gains in the days after this second report was published; however, over the course of the month of July, AVGO has continued to rise, apparently on its own accord. And, with that in mind, we wanted to take a look at what the credible authors that the Nobias algorithm tracks had to say about the stock’s prospects, even without the SAS acquisition in mind.
Nobias 5-star rated analyst, Nicholas Rossolillo recently published an article on Nasdaq.com titled, “3 Reasons Broadcom Is A Dirt Cheap Tech Dividend Stock”. The title here speaks for itself with regard to his bullish lean; however, he made it clear that in his opinion, the company can stand on its two feet just fine, even without increased exposure to software sales.
Rossolillo highlighted the strength of Broadcom’s semi-conductor business, saying, “During the fiscal 2021 second quarter (the three months ended May 2, 2021), total revenue increased 15% year over year to $6.61 billion. Driving this increase was a 20% rise in semiconductor sales, which make up about three-fourths of Broadcom's business.” He noted that AVGO’s chip segment has struggled a bit in recent years due to pressures put onto the company by the U.S./China trade war and then the COVID-19 pandemic, which created supply chain bottlenecks in the semiconductor industry.
However, he was quick to point out a demand turnaround, saying, “But now chips Broadcom specializes in are in high demand, especially for mobile phones (including for 5G mobility), data centers, business networking equipment, and automotive tech.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Rossolillo also highlighted the fact that AVGO has been busy in recent years in the merger and acquisition markets, acquiring other software oriented names such as CA Technologies, Symantec, and Brocade Communications. He said, “because of these acquisitions in the last few years, Broadcom's overall gross profit margin was 61% in fiscal Q2, compared to 56% a year ago and just 54% at the end of fiscal 2018.”
And, moving forward, Rossolillo remains bullish, noting that “Steady software growth paired with rallying chip sales means Broadcom's bottom-line will likely grow at an even faster rate for the remainder of this year.” And lastly, he touched upon the company’s strong cash flows, saying, “Broadcom reported a 28% increase in net income in Q2 to $2.98 billion and free cash flow of $3.44 billion. That equates to an incredible free cash flow profit margin of 52%.”
These cash flows have allowed AVGO to generously return cash to shareholders via a growing dividend. AVGO currently yields 2.97%, which is more than twice as high as the S&P 500’s 1.27% dividend yield. Right now, AVGO shares trade for 17.6x 2021 earnings-per-share expectations, which means that this company has a sub-market multiple. It appears that analysts believe this is a good deal, considering the stock is expected to grow its bottom-line at a 24% clip this year.
Ninety percent of the credible authors that we track with the Nobias algorithm have a “Bullish” rating on AVGO shares. Right now, the average credible analyst price target on AVGO is $526.63, which implies upside potential of approximately 8.5% when compared to the stock’s current share of of $485.40.
Disclosure: Nicholas Ward is long AVGO. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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