Broadcom Surges On New Deal With Apple

Secular Trends Will Lift Broadcom In 2020

Broadcom (AVGO) announced not one but two new deals with Apple (AAPL) this morning. The multi-year contracts obligate Broadcom to supply Apple with wireless components and are in addition to existing contracts. Apple already represents about 20% of Broadcom revenue, these contracts are worth an estimated $15 billion by 2023. Assuming Apple purchases an equal amount each year for the next three years, the new deals double its business with the chipmaker.

Little detail has been given other than components “for wireless” devices but we can assume much of the new purchase is intended for 5G. The 5G revolution began last year with the roll-outs of test-networks from T-Mobile (TMUS), AT&T (T), and Verizon (VZ). The switch-over is expected to accelerate later this year when those networks are expanded to general service.

Apple is expected to launch its 5G phones later this year or in early 2021. There had been some concern the leading maker of consumer tech could secure the chips to meet expectations. It appears Apple was indeed able to do so but that’s another story. Bottom line, the 5G market is projected to grow at +50 CAGR over the next five to ten years, both Broadcom and Apple are well-positioned to claim a large piece of that pie.

The Bigger Picture Is Just As Bright For Broadcom

The bigger picture is just as bright for Broadcom. The Intel (INTC) earnings report, released just this morning, highlights a number of secular trends that will aid Broadcom’s results moving forward. Intel reported improvements in both personal computing and data-center demand that point to additional revenue strength later this year.

Data-center demand is driven by the hyper-scale players like Amazon (AMZN) and Microsoft (MSFT) as they build out their Cloud-computing services. PC demand is outpacing Intel’s current production prompting them to increase it. In either case, segments of the semiconductor industry Broadcom is well-exposed to.

Bringing the focus back to 5G, the 5G revolution is expected to spur the IoT revolution as well. The IoT roll-out stalled, mostly due to slow connection speeds, and 5G will correct the issues. When that happens, demand for all types of semiconductors and solutions will accelerate. Worth about $1.1 billion in 2018, the IoT industry is expected to grow at a 35% CAGR through 2024.

The Earnings Outlook And Dividend Forecast Are Robust

The earnings outlook for 2021 was already good, with the addition of Apple’s new contract we can expect to see analysts’ targets soon raised. The current consensus is revenue growth of 6.% and EPS growth of 10%, that could easily rise to revenue in the range of +25% for the fiscal period.

The dividend is equally robust and relatively safe. The stock is yielding 3.5% at today’s prices, down a bit from yesterday, but still well above the broad-market average. The company’s free-cash-flow and earnings growth are healthy, barring unforeseen events, they guarantee distribution coverage in future quarters.

Broadcom is also a dividend growth stock with a high probability of increasing the payout in future years. The payout ratio is low at 48% next year’s earnings and likely to move lower once the new Apple contracts are factored in. The number that should get dividend-growth investors excited is the 5-year distribution growth rate, over 50%, so there is a chance future increases will be substantial.

The Technical Outlook: A Break To New Highs Is Possible

Broadcom shares surged on the news this morning and opened just shy of the previous intraday all-time high. After a quick jump to the new all-time high territory, the bears took control and drove prices lower. The candle forming is red and confirms resistance at the all-time high so there is some concern price action could fall in the near-term.

The indicators are bullish and have room to run higher so any decline in price that forms now is likely to be small. The first target for support is at the $320 level and is possibly very strong. A move to there would close the gap which formed after the Apple news and may trigger another round of buying.