AVGO Stock: Crisis or Major Chip Investment?

Broadcom Inc. (AVGO), a leading semiconductor and infrastructure software company, recently completed its acquisition of VMware, Inc., a provider of multi-cloud services, for $69 billion. This acquisition, first announced in May last year, formally closed on November 22, 2023. The deal received regulatory clearance from various countries, including the U.S., United Kingdom, and China.

Hock Tan, President and CEO of Broadcom, said, “We are excited to welcome VMware to Broadcom and bring together our engineering-first, innovation-centric teams as we take another important step forward in building the world's leading infrastructure technology company.”

“With a shared focus on customer success, together we are well positioned to enable global enterprises to embrace private and hybrid cloud environments, making them more secure and resilient. Broadcom has a long track record of investing in the businesses we acquire to drive sustainable growth, and that will continue with VMware for the benefit of the stakeholders we serve,” he added.

AVGO’s main focus is to allow enterprise customers to create and modernize their private and hybrid cloud environments. As a result, the company will invest in VMware Cloud Foundation, the software stack that serves as the foundation of private and hybrid clouds.

In addition to Broadcom’s investment in VMware Cloud Foundation, VMware will provide a list of services to modernize and optimize cloud and edge environments like VMware Tanzu to help accelerate the deployment of applications, Application Networking (Load Balancing) and Advanced Security services, and VMware Software-Defined Edge for Telco and enterprise edges.

Wall Street analysts believe AVGO’s stock will increase following the VMware acquisition.

On December 4, Oppenheimer analyst Rick Schafer presented a positive outlook for Broadcom by maintaining an Outperform rating and revising his price target to $1,100.

Also, on November 24, KeyBanc Capital Markets analyst John Vinh raised his price target on AVGO by 20% from $1,000 to $1,200. Also, the analyst maintained his “Strong Buy” rating on the stock. In a note to clients, Vinh expects the acquisition to be immediately accretive to the company’s earnings and gross margin.

John Vinh commented that KeyBanc is “constructive on the acquisition because it is highly complementary to Broadcom’s infrastructure and semiconductor franchises.”

Further, according to Evercore ASI analyst Matthew Prisco, Broadcom’s software sales will increase to nearly 40% of its total revenue in the first year after the acquisition closes. Prisco rated AVGO’s stock as Outperform with a price target of $1,050.

Shares of AVGO have gained more than 15% over the past six months and nearly 66% year-to-date. Also, the stock has surged approximately 74% over the past year.

Now, let’s discuss some of the factors that could impact AVGO’s performance in the near term:

Solid Financial Performance in the Last Reported Quarter

For the third quarter that ended July 30, 2023, AVGO reported net revenue of $8.88 billion, beating analysts’ estimate of $8.86 billion. This compared to net revenue of $8.46 billion in the same quarter of 2022. Its non-GAAP gross margin grew 3.7% year-over-year to $6.67 billion.

Broadcom’s non-GAAP operating income came in at $5.54 billion, an increase of 6.5% from the prior year’s quarter. Its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. The company’s non-GAAP net income rose 8.4% year-over-year to $4.60 billion. It posted non-GAAP net income per share of $10.54, compared to the consensus estimate of $10.43.

Furthermore, net cash provided by operating activities increased 6.7% year-over-year to $4.72 billion. AVGO’s free cash flow stood at $4.60 billion, up 6.7% from the same period last year.

Upbeat Fiscal 2023 Fourth-Quarter Guidance

“Broadcom’s third quarter results were driven by demand for next generation networking technologies as hyperscale customers scale out and network their AI clusters within data centers,” said CEO Hock Tan. “Our fourth quarter outlook projects year-over-year growth, reflecting continued leadership in networking for generative AI.”

After solid third-quarter earnings and confidence in continued business progress, AVGO expressed an optimistic view on the fiscal 2023 fourth quarter ended October 29, 2023. The company expects its fourth-quarter revenue to be nearly $9.27 billion, an increase of around 4% from the previous year’s period. AVGO’s adjusted EBITDA is expected to be approximately 65% of projected revenue.

“We generated $4.6 billion in free cash flow in the third quarter, and expect cash flows to remain solid for Q4,” said Kirsten Spears, CFO of Broadcom.

Impressive Historical Growth

Over the past three years, AVGO’s revenue and EBITDA grew at CAGRs of 15.2% and 24.7%, respectively. The company’s EBIT improved at a CAGR of 61.4% over the same period. Moreover, its net income and EPS increased at CAGRs of 77.6% and 83.2% over the same timeframe, respectively.

Also, the company’s levered free cash flow grew at a 6.9% CAGR over the same period.

Positive Recent Developments

On November 30, AVGO introduced the industry’s first switch with an on-chip neutral network, NetGNT (Networking General-purpose Neutral-network Traffic-analyzer), in its new, software-programmable Trident 5-X12 chip. The new Trident 5-X12 will double bandwidth, reduce power by 25%, and add a neutral network to enable next-generation telemetry, security, and traffic engineering.

 On October 17, Broadcom announced the availability of Qumran3D, the next-gen of the StrataDNX family of single-chip routers. Qumran3D will accelerate the transition to merchant silicon routers by considerably reducing carrier and cloud operator TCO with unprecedented scale.

This new single-chip router will raise the bar for carrier and cloud operator solutions by delivering high-performance, low-power, and security-rich networking. It will meet growing bandwidth and security demands faced by service providers amid increased AI, mobile edge, and other high data deployments.

Also, on September 26, AVGO’s division, Symantec, partnered with Google Cloud to embed generative AI into the Symantec Security platform in a phased rollout that will provide customers a technical edge for detecting, understanding, and remediating sophisticated cyberattacks.

“Our partnership with Google Cloud is part of that continuing journey to put the most innovative security solutions possible into user hands. Our engineers have simplified the process in ways that will enable customers to be much more productive and effective. This is just the beginning of a great collaboration that will help to kickstart the benefits of AI throughout the broader security ecosystem,” said Adam Bromwich, CTO and Head of Engineering, Symantec Enterprise Division, Broadcom.

Broadcom’s Commitment To AI

On October 10, AVGO showcased its vision for AI acceleration and democratization at the 2023 Open Compute Project Global Summit. The company’s commitment to unleashing the AI potential at scale is achieved through a combination of ubiquitous AI connectivity, innovative silicon, and open standards.

This also reflects Broadcom’s commitment to its standardization work toward an open hardware ecosystem for AI workloads.

“Today, AI is pushing technology to its boundaries. Broadcom is focused on innovating to interconnect the key components of an open AI platform within the data center. Our goal is to partner with hyperscalers and enterprise OEMs to build leading-edge AI products and solutions,” said Charlie Kawwas, Ph. D., President, Semiconductor Solutions Group, Broadcom.

AGVO will witness growing demand for its products from companies developing AI capabilities. As per a report by Bloomberg Intelligence (BI), the generative AI market is expected to reach $1.30 trillion over the next ten years from a market size of just $40 billion in 2022, expanding at a CAGR of 42%.

Favorable Analyst Estimates

Analysts expect AVGO’s revenue for the fourth quarter (ended October 2023) to grow 3.9% year-over-year to $9.28 billion. The consensus EPS estimate of $10.96 for the same period indicates a 4.9% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects AVGO’s revenue and EPS to grow 7.8% and 11.7% year-over-year to $35.80 billion and $42.03, respectively. In addition, the company’s revenue and EPS for the fiscal year 2024 are expected to increase 22.7% and 46.2% from the previous year to $52.33 billion and $45.49, respectively.

Attractive Dividend

AVGO pays an annual dividend of $18.40, which translates to a yield of 1.98% at the current share price. Its four-year average dividend yield is 3.04%. Also, the company’s dividend payouts have increased at a CAGR of 21.3% over the past five years. Broadcom has raised its dividends for 12 consecutive years.

Robust Profitability

AVGO’s trailing-12-month gross profit margin of 74.27% is 52.6% higher than the 48.67% industry average. The stock’s trailing-12-month EBIT margin of 45.7% is 874.3% higher than the 4.69% industry average. Likewise, its trailing-12-month net income margin of 39.25% is significantly higher than the 2.20% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 64.57%, 16.63%, and 19.44% are considerably higher than the industry averages of 1.01%, 2.60%, and 0.26%, respectively. Its trailing-12-month levered FCF margin of 38.97% is 375.16% higher than the industry average of 8.20%.

Bottom Line

Broadcom surpassed analyst estimates on the top and bottom lines in the last reported quarter. The company’s outstanding third-quarter performance was driven by robust demand for next generation networking technologies.

In addition, AVGO’s long-term outlook appears promising, propelled by continued leadership in networking for generative AI, strategic investments, and partnerships. Recently, the chipmaker completed its acquisition of VMware, enabling it to accelerate its adoption of cloud technologies. AVGO’s stock has surged more than 65% year-to-date on the back of the VMware deal closing and AI wave.

Given its solid financials, high profitability, and rosy growth prospects, it could be wise to invest in AVGO now.

Stocks Set to Pop Off Following 4th of July

With the pandemic in the rearview mirror, Independence Day has taken on an entirely new significance for most Americans this time. Americans appear to have gone above and beyond to compensate for the years spent indoors by making the most of the (unofficially) long weekend with short trips, camping, cookouts, pool parties, and eating out.

The increased demand for, and consequently expenditure on, services and experiences is also evident in the recent employment data, with leisure and hospitality adding 208,000 positions out of the expectation-beating private sector employment increase of 278,000 for May. The sector was also a notable contributor to the increase of 339,000 in non-farm payrolls for the month.

In view of the above, leisure stocks could be the beneficiaries of the increased levels of outdoor activities around the nation’s Independence Day. In this context, the following stocks that could witness significant upsides in the near term could be worth watching.

The Walt Disney Company (DIS)

While the global entertainment giant has recently been in the news for its ongoing feud with Gov. Ron DeSantis, outside the political and legal arena, DIS is going through a significant transition under the leadership of its returned CEO, Robert A. Iger.
In addition to the Disney Entertainment and the ESPN divisions, the rest of DIS’ businesses will be organized under the existing parks, experiences, and products division.

As a result, DIS reported significant growth at its theme parks during the fiscal second quarter, which saw a 17% increase in revenue to $7.7 billion, with around $5.5 billion contributed by theme-park locations. Moreover, its cruise business also saw an increase in passenger cruise days as guests spent more time and money visiting its parks, hotels, and cruises domestically and internationally during the quarter.

Domino's Pizza, Inc. (DPZ)

The global pizza chain operates two distinct delivery and carryout service models within its stores. The company operates through three segments: U.S. stores; international franchises; and supply chain. In addition to company-owned and franchised stores across the United States, its network of franchised stores is spread in 90 international markets.

Given the increased outdoor activity, while delivery sales will stabilize, carryout sales are expected to grow in the next twelve months. In view of the widespread reversal of consumer behavior to pre-pandemic patterns, on June 20, DPZ launched its Pinpoint Delivery service nationwide that allows customers to receive a delivery almost anywhere, ranging from parks and baseball fields to beaches, without a standard address.

American Airlines Group Inc. (AAL)

Being one of the major air carriers, AAL is reaping the bounty of the surge in leisure travel during the first summer in three years in which the pandemic is not making headlines.

With enough pent-up demand from consumers ever keener to redeem their pile of airline miles and other travel rewards on their credit cards through revenge travel, it’s unsurprising that AAL has turned to bigger airplanes, even on shorter routes, to help ease airport congestion and find its way around pilot shortages.

As a result of this tailwind, AAL’s revenue surpassed the airline’s cost to help it report a $10 million profit during the first quarter of the fiscal year. Moreover, with fuel prices yet to rise significantly due to a stuttering recovery of the Chinese economy and Memorial Day travel topping 2019 levels, the operator has raised its adjusted earnings outlook for the second quarter.

Nathan's Famous, Inc.

NATH operates in the food service industry as an owner of franchise restaurants under Nathan’s Famous brand name. The company also sells products bearing Nathan’s Famous trademarks through various distribution channels.

Driven by post-pandemic momentum, for the fiscal year that ended March 26, 2023, NATH’s revenues increased 13.8% year-over-year to $130.79 million. During the same period, the company’s income from operations increased by 15.3% year-over-year to $34.45 million, while its adjusted EBITDA grew 16.8% year-over-year to come in at $36.38 million. As a result, net income for the fiscal came in at $19.62 million, up 44.3% year-over-year.

Is Meta Platforms (META) a Buy with Plans for New App to Rival Twitter?

On October 27, 2022, Elon Musk completed his purchase of Twitter, Inc. Before everyone could let that sink in (figuratively as well as literally), the maverick entrepreneur implemented sweeping changes at the social networking company. In addition to slashing its headcount significantly, it also leaned on automation to moderate content.

While Mr. Musk claims that it has gained users after the change of ownership and management as an advertising-reliant business, Twitter’s troubles are far from over. It has witnessed an exodus of advertisers that was triggered by concerns, including the deterioration of moderation standards at the platform and a botched relaunch of Twitter’s subscription service, which led to a slew of verified impersonator accounts.

On March 10, Facebook-parent Meta Platforms, Inc. (META) announced its plans for a new decentralized, text-based social network. The stand-alone app, codenamed P92, is being built with the expectation of some of Twitter’s disenchanted users looking for alternatives after overhauling the microblogging site.

On June 9, META’s Chief Product Officer Chris Cox said the app aimed for “safety, ease of use, reliability” and giving creators a “stable place to build and grow their audiences.”

Given that public figures reportedly want a similar platform that is “sanely run,” Cox added that META was in discussion with Oprah Winfrey, who has more than 42 million followers on Twitter, and the Dalai Lama, who has nearly 19 million, to be potential users.

The project is being helmed by Adam Mosseri, head of Instagram, META's image-sharing app. The coding began in January, and although no date was given, there is some speculation that it could be released as early as the end of June.

From the screenshots that were shared internally and have since appeared online, the app's layout bore a resemblance to Twitter. However, it would enable users to log in using their Instagram credentials and could allow users to follow accounts they already follow on Instagram.

By relying on a protocol called ActivityPub, which enables interoperability between social networks, META is also exploring integrations allowing users to bring followers from their accounts with existing social networks like Twitter or Mastodon. This could bring down switching costs and encourage adoption.

How the Market Reacted?

META has been finding many takers on the Street in what, according to it, is its Year of Efficiency. In this context, its initiative to take on its more accomplished microblogging peer has been welcomed by investors.

Since the announcement of P92 on March 10, META’s stock has gained around 57% compared to the 14.6% gain of the S&P 500.

The Jury Is Still Out

Decentralization and interoperability are double-edged swords. While META hopes to gain adoption by lowering the entry barriers for users of other networks, in theory, this could also allow users of its new app to take their accounts and followers to apps supported by ActivityPub, such as Mastodon.\

Secondly, excluding its flagship social-networking app, META’s attempts at organic growth have a track record of flops, including the very name of the company and the purpose behind adopting the new nomenclature. Previous attempts at cloning, such as Lasso, which was supposed to offer an alternative to TikTok, have also failed.

Lastly, decentralized social networks, such as Mastodon or Jack Dorsey-backed Bluesky, rely on individual servers that use a uniform protocol, avoiding centralized content control and possible censorship.

Hence it remains to be seen if and how META, which is driven primarily by advertisement revenue, can productively marry decentralization with ownership while respecting the privacy of its users.