Categories Analysis, Technology

Broadcom (AVGO) looks to leverage software power, 5G adoption

The software business grew in double digits so far this year, while the core semiconductor business contracted

The virus-driven uncertainty has had a mixed impact on Broadcom Inc. (NASDAQ: AVGO) so far this year. The tech company’s non-core business continues to thrive, aided by a spike in demand due to the new business dynamics that compel enterprises to go digital.  

Read management/analysts’ comments on quarterly results

The growing demand from cloud service providers and telecommunications firms helped Broadcom ease the impact of the slowdown on the business. Though its wireless offerings are being hit by curbs on enterprise spending, the growing adoption of 5G systems is expected to offset it. That, combined with the hectic cloud migration, should help the San Jose-based chipmaker to end the fiscal year on a high note.

Optimistic View

The positive trend so far in the current quarter justifies the management’s bullish outlook. What needs to be seen is whether that momentum would translate into shareholder value. After pulling back from last week’s record highs, the stock bounced back soon after the solid third-quarter results and hovered near the peak once again. There is no doubt that investors looking for long-term returns would add Broadcom to their portfolios –  the current price target represents an upside of more than 12%. Moreover, the company has raised its dividend for nine years consecutively.

Apple Power

Taking a cue from the market’s encouraging response to its infrastructure software push, the company is going deeper into that area of the business, while also enhancing its prowess in AI-driven solutions. Apple (APPL) being one of its largest customers, Broadcom’s chip business is poised to get a boost before year-end, ahead of the next iPhone launch that was delayed due to the pandemic.  Estimates show that Apple would account for about a quarter of the total 5G-enabled smartphone sales by next year.

Broadcom Q3 earnings, revenue grow

Predicting improvement in performance in the final months of the fiscal year, Broadcom’s president and chief executive officer Hock Tan said during the third-quarter conference call, “We remain well-positioned to address the work-from-home environment, especially with many of our networking and broadband products in the cloud and telcos. In addition, we expect to soon start from benefiting from the transition to 5G and new product ramps later this year.”

Q3 Revenue Up

In the July-quarter, a contraction in the core Semiconductor Solutions segment was more than offset by double-digit growth in the Infrastructure Software division, resulting in a 6% increase in total revenues to $5.8 billion. At $5.40 per share, adjusted earnings were up 5% from last year and above the consensus forecast.

Broadcom’s cash flow position has been impressive in recent months, despite the unfavorable operating conditions. But that might not be sufficient for the company to reduce its high debt, which remains a drag on the otherwise strong balance sheet.  When it comes to the future performance of industrial and enterprise businesses, discretionary spending by customers will continue to be a dampener. Also, the broadband business is seen losing steam, after staying agile in the early part of the second half.  

We think the balance sheet is in a very good place as we exited fiscal ’20. And then we’re back to sort of, I think, a normal behavior in terms of looking at how to drive the total shareholder return above and beyond the dividend, allocating capital, either to M&A and/or to buybacks.

Hock Tan, chief executive officer of Broadcom

Stock Resilient

At the beginning of the month, Broadcom’s shares climbed to an all-time high of $377.34 but retreated in the run-up to the earnings announcement. Though the stock has regained momentum after that, currently it is trading down 24% from last year’s levels. Meanwhile, its value more than doubled since falling to a multi-year low in March.

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