$AVGO: Gets Billion Dollar Deal with Apple & Earnings Results This Week

In today's edition, we will track the fundamental readings of long-term bullish companies in strong (TigerTrade Top 1 Gainer) concepts each week and look forward to your attention and discussion.

Disclaimer: Capital at risk. This is not direct financial advice or a recommendation to acquire or dispose of any investment, but for communication only.

It was a turbulent week in markets as the debt ceiling deadline loomed, but U.S. tech stocks and foreign markets helped keep the major indices inching higher.

The best-performing industries are semiconductors, semiconductors equipment, electronic components and so on.

The last post analysis $Navitas Semiconductor Corp(NVTS)$ about “$NVTS: Revenue Growth and Market Diversification in 2022, Expected to Double in 2023.”

Let's see what other semiconductor stocks to watch this week.

Considering the different perceptions of the stock, this time TigerPicks choose  $Broadcom(AVGO)$ to have a fundamental highlight to help users understand it better. The earnings are on Thursday after the market.

$Broadcom(AVGO)$

Broadcom Inc. is a high-quality semiconductor player that has a compelling long-term outlook and nice dividend properties. The company has just announced a new, multi-billion dollar deal with tech giant Apple (AAPL). While this is not an absolute game-changer, it still should be beneficial for Broadcom, and the deal also proves that Broadcom is a trusted partner of tech hardware leaders such as $Apple(AAPL)$.

A Nice Endorsement From A Quality Customer

Broadcom Inc. and Apple have announced a deal that will see Apple buy 5G radio frequency components and cutting-edge wireless connectivity components worth several billion dollars from Broadcom over a multi-year period. The components will be manufactured in the United States, in facilities such as Broadcom's Fort Collins, Colorado facility.

With Apple deciding that Broadcom is the supplier of choice for this deal, Broadcom has gotten a major endorsement. Apple generally seeks to use high-quality components for its high-quality and premium-price products, and with APPL deciding that Broadcom is the best partner for the development and manufacturing of quality 5G components, it looks like AVGO is in a strong position tech-wise. Otherwise, Apple would likely not have opted for a deal with AVGO and might have done a deal with a different supplier instead. The endorsement by Apple, in turn, could result in other significant 5G component deals for Broadcom in the future, both by Apple as well as by other potential customers. When Apple comes to the conclusion that Broadcom is the best partner for this deal, peers such as Samsung might come to the same conclusion and could do additional deals with Broadcom.

Yet, with a top customer such as Apple giving a major endorsement, one can assume that Broadcom's business outlook is quite solid going forward - further deals with other customers could follow, and AVGO could be well-positioned for market share gains in the 5G market. Especially with the built-in-America argument working in Broadcom's favor when it comes to additional deals with Apple and/or other customers, the deal and its implications look positive for Broadcom.

Is Broadcom A Buy?

When we consider that we might enter a recession in the second half of 2023 or in 2024, the share price increase that Broadcom has experienced seems like it has not been driven by fundamentals.

Earnings per share estimates for this year have moved up by 2% over the last six months, and are down marginally over the last month. And yet, Broadcom's shares rose 29% over the last six months and are up by 8% over the last month alone. The share price performance has thus largely been driven by multiple expansion and not by underlying business growth or a big improvement in Broadcom's near-term earnings outlook.

This does not necessarily mean that Broadcom is overvalued today, but it seems like a considerably less appealing investment today - at all-time highs - compared to six months ago. We also see this in the company's earnings multiple:

Hiked dividend

While Broadcom was trading at earnings multiple of less than 13 back in December - which arguably was pretty cheap for a high-quality compounder such as AVGO - the company is trading for a substantially higher 17x earnings multiple today, based on current estimates. That is not an excessive valuation, I believe, but the margin of safety surely is smaller today, relative to six months ago.

At least from a valuation perspective, Broadcom Inc. has thus become less attractive in the recent past, as its shares ran higher and higher. The same holds true when we look at the company's dividend. While the dividend is still significantly higher than what one can get from the broad market and the tech industry on average, the yield has dropped substantially over the recent past. Back in December, Broadcom's dividend yield was north of 3%, while it is 2.7% today - still good relative to what one can get elsewhere in the tech world, but naturally, the higher initial starting yield half a year ago was more appealing. For those that bought two quarters ago, the dividend yield on cost has risen to 3.5% by now, as Broadcom has hiked its dividend in the meantime.

I do believe that investors that buy Broadcom today will do reasonably well in the long run, thanks to a combination of rising dividend payments and underlying earnings growth, driven by M&A, buybacks, and organic growth thanks to deals such as the one with Apple. And yet, the total return outlook is not as great as it was twelve or six months ago, when the dividend yield was higher, thereby allowing for more powerful dividend reinvestment, and when AVGO investors additionally were able to benefit from multiple expansion.

Products

Broadcom has three primary switching platforms that will benefit from AI: Tomahawk, Trident, and Jericho. For example, in March, Broadcom announced the world's first 51.2 Tbps (terabits per second) switch in production volume. The leading-edge Tomahawk 5 Family of Ethernet chips were engineered specifically to accelerate AI/ML deployments. The company says the Tomahawk 5's 51.2 Tbps of switching capacity is twice that of any other switch on the market and, as a result, enables the fastest data transfer between AI/ML endpoints. The Tomahawk 5:

... enables single-hop connectivity between 256 high-performance AI/ML accelerators, each having 200Gbps of network bandwidth. This results in the fastest completion time for AI training and inference jobs, including for today’s increasingly complex and prevalent generative AI models.

On the Q1 conference call back in March, Broadcom CEO Hock Tan reported on a companion networking product that will dovetail nicely with the Tomahawk 5 switch:

So just this week, we announced the industry’s first integrated silicon photonics networking solution code name Bailey, which integrates the active optical interconnects with our next-generation Tomahawk 5 switch at 51.2 terabit per second. Bailey doubles switching performance but it will reduce total system power.

Tan went on to describe the impact AI is having on its hyperscaler customers, which already deploy the company's Jericho 2 switches in their AI networks. He estimated that, in 2022, the company's Ethernet switch shipments deployed in AI was over $200 million but:

With the expected exponential demand from our hyperscale customers, we forecast that this could grow to well over $800 million in 2023. We anticipate this trend will continue to accelerate and mindful that we need even more higher performance networks in the future.

That's an expected quadrupling of its switch business in one year, and, therefore, I expect the impact to begin to hit the top and bottom lines in the Q2 report next week. Indeed, Broadcom's networking segment could easily grow ~15% this year.

In addition, Broadcom also has a thriving custom application specific integrated circuit ("ASIC") business (~$2 billion in FY22), which should also have strong AI related tailwinds going forward and could potentially grow by an estimated 40% this year.

Future return

Broadcom is likely on target to deliver another strong quarterly report characterized by moderate-but-steady revenue growth, strong margins, and strong free cash flow. Regardless, I'm relatively sure that a year from now, Broadcom will be significantly higher than it is today.

I'll end with a 10-year total returns comparison of Broadcom vs. the QQQs, the S&P 500 as represented by the VOO ETF, and the DJIA as represented by the SPDR DJIA ETF (DIA):

Chart

As you can see, Broadcom has dominated the major broad stock market indexes over the past decade. In addition, note that Broadcom made multiple large acquisitions over the timeframe shown, and that CEO Hock Tan proved himself again-and-again by buying those businesses and ringing out high-margins and free cash flow. I see no reason to doubt a deal (if consummated) with VMware would be any different. Or that Broadcom will continue to outperform the broad major market indexes over the coming decade.

Stock Price Forecast:

Here are the target price forecast for the future 12 months from analysts on CNNMoney.com.

The 22 analysts offering 12-month price forecasts for Broadcom Inc have a median target of 707.50, with a high estimate of 850.00 and a low estimate of 600.00. The median estimate represents a -12.96% decrease from the last price of 812.81.

Hope this analysis helps you get more understanding of the company's whole image, Tiger Picks will follow up the monthly performance as a longterm track.

Resource:

https://seekingalpha.com/article/4606837-broadcom-gets-a-multi-billion-dollar-deal-from-apple

https://seekingalpha.com/article/4606135-broadcom-ai-will-influence-q2-earnings-report

What are your thoughts on $Broadcom(AVGO)$?

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