Broadcom Pops On Results, VMWare Deal
Price action in Broadcom (NASDAQ: AVGO) experienced significant downward pressure over the past two quarters but we think those days are behind the stock. The downward pressure is due in large part to institutional selling that we see ending now the Q2 results are in the bag. The institutional selling reached a fear-driven crescendo just before the results were released and those results did not confirm those fears. If anything, the results point to ongoing strength for this company and more. The addition of VMWare to the fold will not only increase top-line results but offer a plethora of synergies and cross-selling opportunities.
Broadcom Exceeds Expectations In Q1
Broadcom’s Q1 results were better than expected on all levels. The company reported $8.1 billion in net revenue for a gain of 22.5% which beat the Marketbeat.com consensus by 240 basis points. The strength was driven by a 29% increase in Semiconductor Solutions which is the largest segment by far. The Infrastructure Software segment, which is about 25% of the net revenue, grew by a smaller 5% but both segments aided margin expansion. In regard to margin, the company’s net income grew by 34% while the adjusted EPS of $9.07 grew by 37%. The adjusted earnings also beat the consensus estimates and by a larger 400 basis point margin as well.
Turning to the guidance, the company is expecting to see business momentum carry into the Q3 period at least and has increased its guidance accordingly. The new guidance is calling for quarterly revenue in the range of $8.4 billion compared to the $7.97 billion Marketbeat.com consensus estimate. We find this guidance favorable as well as the expected adjusted EBITDA margin of 63.5%. In our view, the guidance is not only favorable but there is upside risk assuming supply chain and manufacturing log-jams begin to ease as they are expected to do.
The Analysts Are Buying Broadcom
The analysts are buying Broadcom even if the institutions are selling. The 25 analysts with current ratings on the stock have it pegged at a firm Buy and that has been steady over the last 12 months at least. What is not steady is the Marketbeat.com consensus price target which is trending higher versus last year, 3 months, and 1 month ago. There have been at least 3 commentaries released since the Q2 results came out and all three of them include price target increases as well. The key takeaway is the most recent three targets include the new high target of $780 and have the stock trading at least 5% above the current consensus, in new all-time high territory.
And one of the reason’s the analysts are buying Broadcom is the capital return program. Broadcom pays a safe 2.8% and a high yield for tech while buying back stock. The company not only bought back $3.29 billion worth of stock in Q2 but also added about $7 billion to the existing authorization bringing available funds for buybacks up to $10 billion. That’s about 4% of the market cap and could be spent within the next 4 quarters.
The Technical Outlook: Broadcom Hits Bottom, Bounces
The institutions drove Broadcom's price action down to a key support level at $525 just before the earnings release and now the price action is moving higher. The bounce looks strong and confirms support and a bottom at $525 that we see holding in the absence of bad news. The indicators are consistent with a bottom at this level so we are expecting range-bound trading at the very least. The next hurdle for the market is in the range of $600 to $625, if the price action can get above there a test of the all-time high is the next move, if not a move up to set a new all-time high.
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