Broadcom Is Breaking Out To New Highs
Broadcom (NASDAQ: AVGO) is one of the highest quality semiconductor stocks on the market and it certainly shows in the price action. The stock has been in a near-continuous uptrend for over a decade and looks ready to extend the rally to new highs now. The company’s fiscal Q3 results highlight the strength of trends driving this and other stocks within the microchip industry and point to continued success in the quarters and years ahead. More importantly, the company’s success also points to robust capital returns for shareholders, the only questions are when they will come, how they will be deployed, and how high share prices will move because of it.
1. Broadcom Growth Accelerates, Again
Broadcom’s Q3 results are very good. The company reported $6.78 billion in net consolidated revenue for a gain of 16.5% over last year. The revenue is also good for a 2.4% sequential gain, a 30 bps beat versus the consensus estimate, and a 23% gain versus 2019. Notably, this is the 7th sequential-quarter year-over-year growth accelerated and we think not the last. With demand for chips strong throughout the global system, Broadcom is well-positioned to benefit from strength in data-centers, the cloud, and industrial applications.
2. Broadcom Issues Cautious Guidance
Broadcom issued positive guidance for the fiscal fourth quarter if below the analyst’s consensus. The company is expecting about $7.35 billion in revenue for a sequential gain of 8.5%. The bad news is that growth of 14% is also a slow down from the prior quarter but we think the guidance is cautious. Based on the company’s past performance and strength within the industry we expect to see revenue outpace guidance by a fair margin. Regardless, the company is also expecting margin gains to stick which bodes well for cash, cash flow, and capital returns. The company reported a record adjusted EBITDA margin of 61% in the 3rd quarter and is forecasting the same in the 4th quarter.
3. Broadcom Is A Cash-Flow Powerhouse
One of Broadcom’s many attractions is its ability to generate cash and free-cash-flow as evidenced by the 61% margin. The company’s margin strength helped produce a 24% increase in operating profit for the quarter, outpacing revenue growth by nearly 1000 basis points, to drive EBITDA of $4.123 million. Of this, $3.4 billion or 51% of revenue is Free-Cash-Flow available for acquisitions, share buybacks, and dividend increases. The analyst’s chatter has been a little mixed in the wake of the report but Marketbeat’s analyst tracking tools show the general consensus is this company has a lot of cash and cash flow with which to provide value. Jeffries is among the bulls, raising its price target to $590 and near the Street-high, citing a “commitment to share buybacks” would be a catalyst for re-rating the stock.
4. Broadcom Pays A Nice Dividend
Broadcom already pays a nice dividend with a near-3% yield. The payout ratio is a little high at 51% of the analyst’s consensus earnings estimate but the consensus is low and FCF is on the rise. The company has been increasing for the last 10 years with an increase expected next quarter. What we don’t expect is another large double-digit increase, more likely the company will decrease the recently high pace of distribution increases in favor of adding buybacks to the capital allocation plan.
The Technical Outlook: Broadcom Breaks Out To New Highs
Shares of Broadcom broke out of a trading range and set new all-time highs prior to the Q3 release. Shares of Broadcom pulled back from those highs and confirmed support at the previous all-time in the wake of the report. The price action is still faced with minor resistance at the new all-time high but the indications are bullish so we are expecting that resistance to fall. Longer-term, we see this stock continuing the uptrend and reaching the $540 range within the next few months.
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