There Is Fundamental Value In Broadcom, And It Yields 3.35%

Key Points

• Broadcom Inc.'s business is driven by a shift to next-gen products. 
• Q3 results are better than expected and so is Q4 guidance. 
• The analyst rate the stock a Moderate Buy and like what they're seeing. 

It is no surprise to hear that Broadcom Inc’s (NASDAQ: AVGO) business is getting boosted by a shift to next-gen technology. Not only are the company’s next-gen products worth using but the pandemic and stimulus and the ensuing spending and inventory-clearing the followed in their wake set the chip industry up for just such an event. It makes no sense to restock the figurative shelves with old goods when the new stuff is available, does it?

In this light, customers like Apple (NASDAQ: AAPL), Hewlett Packard Enterprises (NASDAQ: HPE), International Business Machines (NYSE: IBM), Dell Technologies (NASDAQ: DELL), ASUSTeK Computer (OTCMKTS: ASUUY), Lenovo (OTCMKTS: LNVGY) and the many other blue chip names on the list are going to drive demand via product shift if not by volume gains and that should drive a cycle of strength for Broadcom. 

"This growth was driven by our strong partnerships with customers and accelerated adoption of our next generation technologies. As we look into fiscal 2023, our increased R&D investments during the preceding years position us to extend our leadership in next-generation products within the end markets we address," said Hock Tan, President and CEO of Broadcom Inc.

Broadcom Broadly Outpaces Consensus Estimates 

Broadcom had a great quarter and it is no joke to say it broadly outpaced the Marketbeat.com consensus estimates. The company reported $8.93 billion in net revenue for a gain of 20.5% over last year that beat consensus by 330 basis points or $0.03 billion. Strength was driven by all end markets and led to record EBITDA margin as well.

The EBITDA margin came in at 63% and drove a 49% FCF margin which is what investors really want to hear. The FCF is going to be used to fuel capital returns including the 12th consecutive annual dividend increase and a resumption of the share repurchase program. 

The company raised the dividend by 12% which is below the 32% CAGR but still strong and much more sustainable. The increase has the yield up to 3.35% with shares up about 3.0% in premarket action. As for repurchases, company CFO Kirsten Spears says they will resume the existing share repurchase program which has $13 billion left or about 6% of the pre-release market cap.

Looking forward, investors can expect this type of activity to be repeated in 2023 due to the guidance if nothing else. The company issued Q4 guidance that is well above the analyst’s consensus and has sparked a round of bullish commentary. 

Oppenheimer analyst Rick Shafer called the results impressive after maintaining an Outperform rating and above-consensus price target. In his view, the results are buoyed by management's careful order and inventory control that has it set up for another goog year in 2023.

"We believe strict scrubbing of orders safeguards (Broadcom) better than most from channel inventory surprise.”  As a group, the analysts view the stock as a Moderate Buy with a price target about 25% above the current price action. 

The Technical Outlook: Broadcom Might Reverse 

The price action in Broadcom hit a bottom a few quarters ago and is now trending sideways. The post-release action has the price up at the top of the new range and position to break out, however, and confirm a reversal. Resistance is at the $560 level, a break of which would be bullish. If the market can get above this level it could continue gaining momentum and move up to the $600 level if not higher. The $560 level is key to this move, however, and may keep the stock range bound if it can not be broken.