Case Study: Broadcom (AVGO) stock according to high performing analysts
Key Points
Performance
Broadcom shares rose by 8.15% this week, pushing their year-to-date gains up to 14.32%. This compares favorably to the S&P 500 which is up by 5.79% on a year-to-date basis thus far and the Nasdaq Composite Index, which is up by 12.54% during 2023 thus far.
Event & Impact
Broadcom posted 2023 Q1 quarter results this week, beating Wall Street estimates on the top and bottom lines. During Q1, AVGO’s revenue totaled $8.92 billion, beating Wall Street’s consensus estimate by $20 million. Broadcom’s Q1 non-GAAP earnings-per-share came in at $10.33, beating Wall Street’s consensus estimate by $0.17/share.
Noteworthy News:
Broadcom continues to execute on its growth plans, resulting in strong fundamentals. These fundamentals have trickled down to shareholders’ pockets, with AVGO becoming a favorite stock amongst dividend investors. Yet, there is M&A risk at play here, with Broadcom’s proposed ~$60 billion acquisition of VMWare still up in the air.
Nobias Insights
90% of recent articles published by credible authors focused on Broadcom shares offer a “bullish” bias. 3 out of the 4 credible Wall Street analysts believe AVGO shares are likely to rise in value. The average price target being applied by these credible analysts is $626.25, which implies downside potential of approximately 1.0% relative to the stock’s current share price of $632.76.
Bullish Take Nobias 4-star rated author, Jonathan Wheeler, said, “I've long admired Broadcom from afar, but haven't opened a position. I think that's going to change here in the near future. The more I dig into the company, the more I like it.”
Bearish Take Vladimir Dimitrov, a Nobias 4-star rated author, said, However, organic growth is slowing down, and Broadcom Inc.'s more aggressive movement into infrastructure software also holds a number of risks. These risks were not as pronounced in the company's prior deals. Thus, investors should not rely so heavily on Broadcom Inc.'s prior success. Although I see Broadcom Inc. as one of the best-positioned semiconductors stocks, I have a hard time turning bullish on the stock.
AVGO Mar 2023
Broadcom (AVGO) reported its fiscal 2023 Q1 results this week, beating Wall Street’s expectations on both the top and bottom lines, causing shares to rally by 8.15% during the past 5 trading sessions. This strong weekly performance has pushed AVGO’s year-to-date gains up to 14.32%, which beats both the S&P 500 and the Nasdaq Composite Index’s year to date returns.
Those two indexes have posted gains of 5.79% and 12.54%, respectively, during 2023 thus far. After Broadcom’s weekly rally, the stock is essentially trading in-line with the credible analyst average price target. Yet, 90% of articles published by credible authors remain bullish on AVGO shares.
Bullish Nobias Credible Analysts Opinions:
Nobias 4-star rated author, Jonathan Wheeler, covered Broadcom in a recent report, highlighting his bullish stance on the company. He wrote, “I've long admired Broadcom from afar, but haven't opened a position. I think that's going to change here in the near future. The more I dig into the company, the more I like it.”
Wheeler said, “The company is a $250B market cap behemoth today, and is an amalgamation of multiple business lines purchased over time. The Broadcom you bought 15 years ago isn't the same company today, by a long shot.”
Looking at its operations, Wheeler noted, “The company derives the majority of its revenues (~70%) currently from semiconductors, with a significant portion of that derived from Apple (AAPL) (~20%) in its wireless line.” But, he likes this industry, stating, “Smartphones have only grown more complex, and Broadcom's chips are more necessary than ever in 5G phones, although competition among the chipmakers is fierce.”
Furthermore, Wheeler notes, “As companies move to the cloud and further digitize, Broadcom's networking expertise should keep their chips in demand in both cloud and on-premises servers.” Then, he points out that Broadcom has a growing software applications business as well.
Wheeler said, “Infrastructure software represents around 30% of the business, and is growing relatively slowly, coming in at 4% on the most recent quarter. However, operating at a 72% margin, it's significant for the company's bottom line, and provides a solid base of cash flows.” He notes that these high margins attract shareholders and said that the company is working on an acquisition that would drastically increase the size of this area of Broadcom’s business.
Wheeler wrote, “The company is looking to dole out ~$60B this year for VMware (VMW), the data center virtualization company. This would bring software revenues up from around 30% to around 50% of revenues.” Looking at AVGO’s balance sheet, Wheeler said, “The company has $39.5B in total debt, and generated $16.31B in free cash flow this past year. What's impressive here is the company is turning 50% of revenues into free cash flow, which grew 25% yoy in the most recent quarter.”
Wheeler also put a spotlight on the company’s shareholder returns, stating, “Broadcom has hiked the dividend every year since 2011, and most recently authorized a 12% increase. On top of that, the company repurchased $8.5B in shares this past year and still has $13B remaining on the current authorization.”
“Since going public, Broadcom has compounded earnings growth at ~30% per year,” he said.. Wheeler continued, “Broadcom has compounded its free cash flow 29% per year since going public.” “However,” he points out, “it's still trading for ~15X earnings and a 3% dividend yield. These types of numbers are almost kind of shocking, and what I'd expect to find in a no-growth type business, not one that just grew revenues 21% last year.”
Looking at forward return expectations, Wheeler stated, “Based on FCF multiples and analyst estimates, an investment today could yield around 12% annualized. That's at current multiples, not the average multiple, which would be substantially more.” Wheeler wrote this report on February 24th, 2023 and concluded it, “Broadcom is a strong buy here.”
Heavy Moat Investments, a Nobias 5-star rated author, also recently published a bullish report on AVGO. This author analyzed the stock from a dividend income lens, highlighting the stock’s popularity amongst dividend growth investors.
Regarding this strategy, they said, “Dividend Growth Investing (often abbreviated as DGI) has been a very popular strategy among investors in recent years due to its potential to generate stable and growing income streams over the long term.”
Heavy Moat Investments continued, “The true power of DGI is shown once dividends are reinvested into the company, creating a snowball effect by compounding the quarterly dividends received over the years.” Then, they highlighted AVGO’s dividend growth history, showing why it’s a great fit for this strategy.
Looking at Broadcom’s historical dividend payments, Heavy Moat Investments said, “From $0.67 in 2013 to $16.9 in the trailing twelve months, an astounding 25-fold increase translates to a median growth rate of 40%. This track record is unmatched and grew the company to one of the largest semiconductor stocks on the planet at an enterprise value of $272 billion.”
Even with such strong historical dividend growth in mind, Heavy Moat Investments believes that AVGO’s dividend remains safe and is likely to continue to grow moving forward. They wrote, “The dividend is also safe at a 41% Free cash flow payout ratio over the last year.”
“According to Seeking Alpha, analysts expect Broadcom to grow its earnings around mid to high single digits and I believe that is a very reasonable assumption. The large earnings power, a low payout ratio, and modest growth going forward should allow AVGO to continue raising its dividend alongside earnings in the high single digits to low teens,” Heavy Moat Investments said. They concluded their piece stating, “As a solid dividend growth stock with ample opportunity to raise its dividend, I'd consider Broadcom a light buy.”
Bearish Nobias Credible Analysts Opinions:
Vladimir Dimitrov, a Nobias 4-star rated author, covered AVGO’s Q1 results in an article published this week at Seeking Alpha, coming away with a more tepid outlook on AVGO shares than Wheeler and Heavy Moat Investments. He began by stating, “Even though performance across business segments was mixed and gross margins noted a decline, Broadcom stock's earnings per share exceeded expectations, both on a GAAP and Non-GAAP basis.”
Looking at Broadcom’s top-line results, he said, “Consolidated net revenue improved 16% year-on-year, entirely driven by Semiconductor Solutions, which increased by 21%. Infrastructure Software, however, fell by 1%, largely driven by softness in Brocade - a business acquired only a couple of years ago in 2017.”
“In a nutshell,” he continued, “it appears that until the pending VMware (VMW) transaction is complete, AVGO's topline growth is expected to be largely driven by its Semiconductor Solutions division and would likely slow down through the rest of 2023.”
“A forward revenue growth of 10% is still impressive but is well below the historical average for Broadcom,” noted Dimitrov. “In terms of gross profitability,” he said, “Broadcom is currently among the highest gross margin semiconductor companies. At the same time, the business is among the least capital-intensive within the broader peer group.”
“In the case of Broadcom,” he continued, “the company has achieved this largely through its recent acquisitions and a stronger focus on software. Although I personally, favor the more capital-intensive peers within the semiconductors space, Broadcom's management has done a very good job historically at both selecting its targets and integrating them within its long-term strategy.”
Ultimately, Dimitrov concluded, “Broadcom Inc.'s Q1 2023 results were yet another testament that the acquisition-led strategy is working. By focusing on low capital intensity and high gross margin areas that were also highly complementary with Broadcom's legacy business, the company was able to sustain both high topline growth and industry-leading margins. All that resulted in outstanding shareholder returns, high dividend increases, and a premium valuation.”
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.
But, even with this good news in mind, he couldn’t ignore the risks associated with Broadcom’s acquisition driven strategy. He said, “However, organic growth is slowing down, and Broadcom Inc.'s more aggressive movement into infrastructure software also holds a number of risks. These risks were not as pronounced in the company's prior deals. Thus, investors should not rely so heavily on Broadcom Inc.'s prior success. Although I see Broadcom Inc. as one of the best-positioned semiconductors stocks, I have a hard time turning bullish on the stock.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 90% of recent articles published by the credible authors that the Nobias algorithm tracks have expressed a “Bullish” bias towards Broadcom. 3 out of the 4 credible Wall Street analysts that the Nobias algorithm tracks who have expressed an opinion on AVGO shares believe that they’re likely to increase in value.
Yet, the lone bear here is dragging down the average analyst price target. After its rally this week, AVGO trades for $632.76. Currently, the average price target being applied to AVGO shares by the credible analysts that Nobias tracks is $626.25, implying slight downside potential of approximately 1%.
Disclosure: Nicholas Ward is long AVGO.. Nicholas Ward wrote this article for Nobias at their request with the intention 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.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.