To The Moon

$Broadcom(AVGO)$ 

Broadcom Inc. (AVGO) designs, develops, and supplies a range of semiconductor and infrastructure software solutions through two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions segment includes Internet protocol (IP) licensing and provides solutions for managing the movement of data in data center, telecom, enterprise, and embedded networking applications. It also provides a variety of radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market. Major end markets include broadband, networking, wireless, storage and industrial. Broadcom derived 66% of its revenues from Asia Pacific, 22% from the Americas, and 12% from Europe in FY21.

Investment Overview

Cementing market leadership through inorganic growth and differentiating technological capabilities. Broadcom specialises in the design/development of semiconductors in the communications and connectivity segments and operates as an infrastructure software provider. Its ability to specialise and lead the market in a spectrum of offerings is enabled through a series of successful mergers, acquisitions, and integrations over the years such as the US$37bn merger between Avago and Broadcom, and acquisitions of CA Technologies (US$19bn) and Symantec Enterprise Security (US$11bn). In May 2022, Broadcom announced the acquisition of VMWare (US$69bn), its largest deal to date. Broadcom differentiates itself through its high-performance design and integration capabilities and focuses on developing products for target markets, with above industry margins. Historical 5-year average EBITDA margin of 46.6% is higher than industry average of c.34%. Consensus expects forward EBITDA margin of 60.7%, much more attractive than c.40% for peers.

Strong demand with long lead time. Current order backlog of US$31bn and lead time of close to a year point to strong customer demand. The waiting time for delivery is longer now, vs about 26 weeks during the start of the pandemic in 2020, and typical lead time of 8-12 weeks pre-pandemic. The drive towards faster and better communications and/or connectivity, e.g., 5G, WiFi 7, 6GHz AFC spectrum, 51.2tbps switches, should propel Broadcom to grow, innovate and deliver newer products and solutions. Furthermore, Broadcom's growth and leading position in the infrastructure software space will be bolstered on the successful acquisition of VMWare - pioneer and still leader of server virtualisation - as more companies move towards cloud computing and cloud infrastructure.

Improving financials underscore right strategic direction. Broadcom's successful integration of its acquisitions are evidenced in its improving financials. The group registered a 10-year CAGR of 28% for revenue and 35% for EBITDA. The shift towards software - with stickier customers and low tendency to switch - has helped to improve margins. EBITDA margin improved to 53.6% in FY21 from 31.5% in FY12. Moreover, Broadcom's track record of generating consistent free cash flows, and paying stable dividends to its shareholders, are also strong differentiating factors vs peers.

 Leveraged acquisitions carry risks. While having exhibited a strong track record of acquisitions and integration, there still runs the risk that future acquisitions may not bring the desired value or synergies. Broadcom’s strategy may also be complicated by (i) added scrutiny placed by antitrust regulators on forthcoming mergers, and (ii) more expensive costs of financing as interest rates rise. It is also susceptible to the heightened US-China tensions, with 36% and 19% of revenues derived from China and the US in FY21. With a net debt to equity ratio of 1.1x, Broadcom is one of the most levered firms in the industry.

I am just careful with semiconductors at the moment.

@TigerStars 

DYODD