Broadcom Limited: Why AVGO Stock Could Reach $200

AVGO StockBroadcom Limited (NASDAQ:AVGO) is now the fourth-largest chip-maker in the world, after its predecessor company, Avago Technologies Ltd, acquired the Broadcom name and company earlier this year.

However, as much as AVGO stock is up over 23% since its first official trading day on February 2, it still has plenty of upside for the remainder of 2016. The stock has not maintained pace with other chip-makers, such as Qualcomm, Inc. (NASDAQ:QCOM)—up over 42%—and Texas Instruments Incorporated (NASDAQ:TXN)—up over 29%—for the same time period.

Apple’s Growth Tied to Broadcom Stock?

The biggest push for AVGO stock lately has been due to the success of the Apple Inc. (NASDAQ:AAPL) “iPhone 7,” which uses several of Broadcom’s chips within its construction. As of February 2, Apple has had almost the same returns as Broadcom, with both being up over 22%. However, since the iPhone 7 release on September 7, only Apple stock has gained in value, with a gain of 8.94%, while Broadcom stock is down 0.59%.

Broadcom executives are optimistic about the company’s wireless sector growth, with its recent third-quarter revenues of over $1.0 billion, a 27% gain from the previous quarter.

Analysts all seem to agree that Broadcom stock has nowhere to go but up, especially with the lagging stock price in relation to Apple. After its third-quarter earnings, CEO and President Hock Tan gave the following statement:

We delivered strong third quarter financial results with seven percent sequential growth in revenue and 14 percent sequential growth in EPS, a clear demonstration of the leverage inherent in our operating model. We are expecting an even stronger performance in the fourth quarter, driven by robust growth in our wireless segment.

(Source: “Broadcom Limited Announces Third Quarter Fiscal Year 2016 Financial Results and Interim Dividend,” Broadcom Limited, September 1, 2016.)

With that being said, 10 analysts rate AVGO stock as “strong buy” and 22 rate it as “buy,” with an average target price of $202.00.

Not Just Wireless

The largest portion of Broadcom stock’s revenues comes from the wired infrastructure, which makes up 54%. The wired portion of the business comprises of technologies like set-top boxes, broadband access, fiber optics, PHY, ASIC, and switching ASSPs.  This wired sector for Broadcom is a slow driver for the company’s bottom line, but is nevertheless essential for the company’s long-term success.

Broadcom stock has been making headway against competitors with the release of the new “Tomahawk II” 6.4 Tbps Ethernet switch, which is the first to deliver 64 ports of 100 GE. (Source: “Broadcom First to Deliver 64 Ports of 100GE with Tomahawk II 6.4Tbps Ethernet Switch,” Broadcom Limited, October 11, 2016.)

Companies like Cisco Systems, Inc. (NASDAQ:CSCO), Hewlett Packard Enterprise Co (NYSE:HPE), and Dell Inc. (NASDAQ:DELL) are all current vendors that have started to increase usage, which should directly benefit Broadcom in the near future.

AVGO Stock: Growth through Acquisition

Broadcom Limited has grown, due to a compilation of acquisitions over the last two decades. Avago Technologies, originally based out of Singapore, acquired the semiconductor and software company LSI Corporation in May 2014. With the now-successful integration of Broadcom and Avago in its rearview mirror, Broadcom Limited is looking for new acquisition targets.

Xilinx, Inc. (NASDAQ:XLNX), which is the top potential target, is known for inventing the field-programmable gate array (FPGA). According to Xilinx’s annual report for its fiscal year ending April 2, 2016, the company generated net annual revenues of $2.2 billion, which means revenue has remained stagnant for the last four years. (Source: “Xilinx Inc Form 10-K (Annual Report),” May 17, 2016).

If acquired, Broadcom can add this revenue to its already-growing expected 2017 revenue to over $16.0 billion.

Other potential targets for Broadcom are Integrated Device Technology Inc. (NASDAQ:IDTI) and Maxim Integrated Products Inc. (NASDAQ:MXIM). However, the concern is not the vast acquisition opportunities that are available to Broadcom stock, but more on how an acquisition will be funded.

With the combining of Broadcom and Avago, the newly formed company has significantly more debt, and any poorly structured acquisition attempt could leave the company severely over-leveraged. That leaves only smaller takeover candidates available for Broadcom and larger companies like NXP Semiconductors NV (NASDAQ:NXPI) that are out of Broadcom’s price range.

Will AVGO Stock Hit $200.00?

Overall, Broadcom Limited should see more growth for the remainder of the year after AVGO stock has slowed down over the last three months. With AVGO stock trading in the $170.00 range, shareholders could expect to see the company hit the $200.00 mark in the near future, primarily due to three causes.

First, if the Apple iPhone 7 exceeds or meets analysts’ expectations, AVGO stock should see a quick uptick in price. Secondly, with most of the revenue coming from the wired infrastructure sector, AVGO stock could see growing sales of its new Tomahawk II technology. Finally, AVGO stock could gain some momentum if Broadcom executives find a profitable acquisition target that doesn’t over-leverage the balance sheet with debt.