Broadcom Ltd (NASDAQ:AVGO) stock is a consistent outperformer. AVGO stock’s financial results over the past several quarters has surpassed the expectations of Wall Street analysts.
In its third-quarter fiscal 2016, Broadcom stock reported adjusted earnings of $2.89 per share, up from $2.24 per share in the same period a year ago. It was also higher than the $2.76 per share expected by analysts.
The company’s revenue was $3.8 billion, an increase of 117% from $1.75 billion in the third quarter of 2015. Analysts expected Broadcom to achieve $3.76 billion in revenue for the quarter. Its gross margin increased from 29.5% to 47% of net revenue. (Source: “Broadcom Limited Announces Third Quarter Fiscal Year 2016 Financial Results and Interim Dividend,” Broadcom Ltd, September 1, 2016.)
Broadcom stock’s average earnings and revenue growth rates were 9.6% and 53.3% over the previous three quarters. Investors are pleased with its strong financial performance. As a result, AVGO stock went up from its lowest price of $111.53 per share to its current trading price of around $170.00 per share (as of September 28) over the past 52 weeks. AVGO stock gained more than 38% over the previous year.
Will Broadcom sustain its growth and profitability and will AVGO stock continue to trade higher over the long term?
Broadcom Stock to Deliver Stronger 4Q Results
Broadcom CEO Hock Tan is confident that the company could provide an even stronger financial performance in the fourth quarter, driven by the robust growth of its wireless segment. 3Q revenue increased 64% to $1.0 billion year-over-year, or 27% sequentially.
Management expected its revenue from the wireless segment to grow 30% sequentially, primarily due to the full ramp-up of a new phone model from its large customer base in North America and continued demand increases from its large handset customers in Asia.
It is also worth noting that Broadcom’s 3Q revenue from its wired infrastructure climbed 454% to $2.07 billion from $372.0 million in the same period a year ago. However, its revenue from the segment was flat sequentially, due to the supply constraints of its set-top box product.
RBC Capital Markets, LLC analyst Amit Daryanani recently suggested that Broadcom’s wired segment will likely deliver low- to mid-single-digit revenue growth over the next several quarters, contrary to the expectations of most analysts that its revenue would be flat. Daryanani noted that some consumers still believed that wired connections are more reliable than wireless connections. Additionally, the churn rate of wired connections in the recent quarter was lower than expected.
During the company’s last earning call with analysts and investors, Hock Tan stated that there is a high demand for fiber-to-the-home products in Broadcom’s broadband access business. The company also sustained growth in its switching and routing application-specific semiconductor standard products (ASSPs) as data center operators continue to upgrade their infrastructure.
Broadcom’s wired segment represents 54% of its total revenue in the third quarter. I believe that the business does not pose a risk; instead it will remain a contributor to the company’s growth and profitability.
AVCO Stock: Balance Sheet & Business Outlook
Broadcom already completed its previously announced divestitures and collected $630.0 million in cash. The company reduced its long-term debt by $1.3 billion in the third quarter.
Its total assets were $49.75 billion compared with its total liabilities of $30.28 billion by the end of the quarter. Its cash balance was $1.96 billion. Based on the figures, the company has a robust balance sheet.
For the fourth quarter of 2016, Broadcom expected its non-generally accepted accounting principles (GAAP) revenue to be around $4.10 billion (plus or minus $75.0 million) and gross margin at 60.5% (plus or minus one percentage point).
The Bottom Line for Broadcom Stock
Broadcom remains a competitive semiconductor device supplier. Its solid quarterly financial results prove that its business strategy is effective. It is highly likely that the company will be successful over the long term and that AVGO stock will continue to deliver generous returns to shareholders.
Take note that its board recently approved a dividend of $0.51 per share. The company has been raising its quarterly dividend since December 2010. At the time, its quarterly dividend was just $0.07 per share. It only shows that Broadcom is a shareholder-friendly company. (Source: “Broadcom Dividend Date & History,” NASDAQ, last accessed September 28, 2016.)
Wall Street analysts believe that Broadcom will continue to outperform the market, and that AVGO stock could trade as much as $217.00 per share, an upside of 27% over the next 12 months. The analysts’ median price target for the stock is $200.00 per share, an increase of 17%.