Is Broadcom Set For a Memorable End to 2020?

Broadcom (NASDAQ:AVGO) could very well be looked at as the forgotten semiconductor stock. AVGO stock is “only” up about 16% for this year. That’s more than just respectable with the volatility investors have seen in the market this year.

However, compared to its competitors, Broadcom has been a laggard. For example, Advanced Micro Devices (NASDAQ:AMD) is up over 80% this year. Nvidia (NASDAQ:NVDA) is up a whopping 135% and Qualcomm (NASDAQ:QCOM) has climbed 38% in 2020.

But sentiment appears to be changing. The consensus price target for AVGO stock is nearly 7% below its current price. However, two recent analyst ratings suggest a price target of $400, which means the stock still has a little room to run.

What is the Earnings Report Likely to Say?

Broadcom is expected to report earnings of $5.23 per share on revenue of $5.78 billion. If the company hits those targets, that would be a bottom line year-over-year gain of 31%, with a modest 4% gain on the top line. Both numbers would also be a slight gain from the prior quarter.

The iPhone is Coming

One of the headwinds for Broadcom stock was due to the uncertainty surrounding the release of the new iPhone. Broadcom has an agreement with Apple (NASDAQ:APPL) to provide chips for their iconic device.

As recently as April, Broadcom CEO Hock Tan suggested that Apple would miss its delivery date. On the conference all, Tan said the following:

“In Q3, we would normally expect to see a double-digit sequential uplift in revenue from the ramp of next-generation phone at our large North American mobile phone customer. However, this year, we do not expect to see this uptick in revenue until our fourth fiscal quarter. So accordingly, we expect our wireless revenue in Q3 will be down sequentially as it was down in Q2.”

Now filling in the gaps, Tan was implying that revenue the company might otherwise get in the quarter just ended would be pushed later. But if the company comes in at $5.78 billion in revenue, that would be a slight gain from the prior quarter.

Apple has historically released new versions of the iPhone in September. If the same were true than you would expect that Broadcom would realize revenue from supplying the chips for the phone in the last quarter. For its part, Apple remains coy, at the very least, about when the iPhone 12 will launch. But it is looking more likely that the phone will hit stores in October as opposed to the “September surprise” that some fans were hoping for.

But as an investor, it really doesn’t matter much to me, if Broadcom realizes the Apple revenue in its fiscal third quarter or fourth quarter. The reality is the company continues to benefit from this partnership.

And that’s not the only partnership that should be a catalyst for AVGO stock.

Broadcom is Still a Partner with Alphabet

Broadcom has a fast-growing business in application-specific integrated circuits (ASICs). Last year, this business unit accounted for $750 million in full-year revenue. In 2016, that was just $50 million. One reason is that Alphabet (NASDAQ:GOOGL) has been partnering with Broadcom in manufacturing their artificial intelligence (AI) processor. This is the fourth generation of the processor and Broadcom has been along for the ride in every case. And, it’s expected that Broadcom will also be involved in the fifth generation processor.

So why isn’t the stock getting more attention?

Broadcom may still be suffering from its relationship with Huawei. In 2019, Broadcom’s business relationship with Huawei came under close scrutiny. In fact, the U.S. government restricted Huawei’s access to components from major U.S. companies. That list included Broadcom and Qualcomm.

However, I think one of the reasons it doesn’t get as much attention from growth-minded investors is because of Broadcom’s reliable and secure dividend. Unlike AMD which does not pay a dividend, Broadcom has a $13.00 annual dividend. The dividend is well covered by just over 36% of the company’s free cash flow (FCF). And, it has raised the dividend for the last nine years.

Broadcom looks like a winner

With the iPhone 12 likely to sell like hotcakes no matter its premium price, Broadcom should see nice revenue through the rest of this year, at least. And with other catalysts in place, including growth from its acquisition of Symantec, Broadcom has been one of the best performing stocks for the last ten years and it appears to have all the makings for a nice rally to close out the year.