The Top Two Reasons to Be Bullish on Broadcom Stock

AVGO StockAVGO Stock Promises More Gains to Investors

Broadcom stock once again grabbed the headlines as Broadcom Ltd (NASDAQ:AVGO) made a bid for Toshiba’s NAND business last week. (Source: “Japan-U.S. bid eyed for Toshiba semiconductor unit sell-off,” The Asahi Simbun, April 19, 2017.)

This news is enough to raise alarms for AVGO stock investors who must be already worried about the company suffering from the actions of Apple Inc. (NASDAQ:AAPL), which has become more keen to take control of its hardware going forward. The smartphone maker’s decision to design its graphics chips in-house led to the plunge in the stock of Imagination Technologies Group plc (LON:IMG) early this month.

Well, Broadcom stock is unlikely to meet such a fate as Apple Inc. has not flashed any indication of venturing into developing chips like radio frequency chips and WiFi combination chips, which Broadcom specializes in. Broadcom is a major supplier of these chips to Apple and there have been reports that the two may also be working together on wireless charging technology for the future generations of the “iPhone.” Apple also has a three-year deal with Broadcom for the supply of RF components and modules.

Broadcom Has a Big Product Portfolio

One major concern right now is what the future of AVGO stock will be if Apple iPhone sales do not live up to the expectations. Would that impact the business of Broadcom?

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Yes, the drop in Apple’s smartphone demand is definitely a threat to Broadcom stock. However, the company is one of the few players in the semiconductor space that is really well-diversified. In terms of industry exposure, Broadcom’s products go into not only smartphones, but also data center servers and networks, set-top boxes, telecommunication equipment, power generators, and many more. So, as compared to other Apple suppliers, Broadcom is very well-positioned to face any storm.

Broadcom Corporation and Avago Technologies merged last year to build the semiconductor behemoth that the company is today. The size and scale of the current entity helps in improving the market share and lowering the cost of production. One of the strengths of Broadcom is that it is focused on controlling the costs, as it continues to innovate in its well-diversified portfolio of products.

The stock chart below shows the steady rise posted over the last one year. AVGO stock has gained about 37% in the year as compared to about 13% posted by S&P 500.

AVGO stock chart

Chart courtesy of StockCharts.com

The company announced its first-quarter results last month and the revenue from its largest segment, wired infrastructure, was $2.09 billion, 50% of Broadcom’s total revenue. The better-than-expected performance was due to strong demand from cloud data center operators, which is likely to continue in the future. High demand for the company’s products going forward augurs well for AVGO stock. (Source: “Broadcom Limited Announces First Quarter Fiscal Year 2017 Financial Results and Interim Dividend,” Broadcom Ltd, March 1, 2017.)

Broadcom Has Financial Discipline

Broadcom plans to grow through acquiring other companies, but that does not mean that it is wasting money. After the successful completion of the $37.0-billion mega merger of Avago Technologies and Broadcom Corporation last year, the combined entity is now bidding for Toshiba’s memory business for about $23.0 billion. However, this shall further help the company in tackling the challenge of the ups and downs of semiconductor market and boost AVGO stock.

Further, Broadcom’s push for innovation is relentless. The company plans to invest about $2.7 billion a year in R&D that would help sharpen its competitive edge.

Broadcom is also focused on achieving free cash flow margin of 35%. The company has committed to increasing its dividend payment in the coming years, which is another great reason to own the stock. The financial discipline and dedication to innovation shall keep driving Broadcom stock higher in the coming days.

The Bottom Line on AVGO Stock

Broadcom stock not only shall enjoy solid growth in the coming days, but also is cheaper as compared to its peers. The stock trades at a lower forward P/E of 13.43 as compared to NVIDIA Corporation (NASDAQ:NVDA), which trades at a forward P/E of over 29. (Source: “Broadcom Limited (AVGO),” Yahoo! Finance, last accessed April 19, 2017.)

Hence, the well-diversified portfolio of products helps the company in mitigating cyclical risks, and its ability to manage inorganic growth together with financial discipline makes it one of the top choices in the industry. With the rebound in the semiconductor space, the future indeed looks very bright for AVGO stock.