Stock Analysis & Ideas

Broadcom: Getting 2 Stocks for the Price of 1

Story Highlights

Broadcom is making the headlines with what could be the year’s most important infrastructure-tech deal. On top of that, the company just posted revenue guidance that’s bound to get investors excited.

California-headquartered Broadcom (AVGO) designs and produces semiconductor-related devices. I am bullish on the stock.

Many technology stocks have come under pressure this year. The wholesale sell-off in tech names doesn’t mean that every company in the space is a no-go. If anything, this is only an opportunity to pick up some Broadcom shares at a discount.

As we’ll discover, Broadcom is growing in more ways than one. From a financial standpoint, the company is truly firing on all cylinders despite global supply-chain problems. Plus, Broadcom is about to grow bigger as a company, literally – but more on that in a moment.

At the same time, Broadcom isn’t appreciated like it ought to be and the company’s intrinsic value isn’t fully reflected in the share price. After delving into the data and getting the scoop on a big-time buyout, you’ll surely be convinced that Broadcom stock belongs in your tech-friendly portfolio today.

Delivering Great Results and Guidance

So far in 2022, the price action of Broadcom stock could best be described as wobbly and directionless. Lately, the shareholders might want to see the stock make another run for $700, but it’s been stalling out in the $500s.

Perhaps Broadcom stock is just consolidating for an imminent run – or at least, that’s what we can hope will happen. One thing that’s indisputable, though, is that the stock offers a pretty decent value since Broadcom’s trailing 12-month P/E ratio is fairly reasonable at 31.4. Furthermore, Broadcom’s forward annual dividend yield of 3.08% ought to keep income-focused investors happy.

On the other hand, informed investors shouldn’t just go chasing dividends. Delivering strong financial results is more important – no doubt about that. Thankfully, Broadcom’s top- and bottom-line results and forward guidance for fiscal-year 2022’s second quarter are highly encouraging.

First of all, Broadcom posted a whopping $8.103 billion in Q2 FY 2022 revenue for the second quarter, up 23% year-over-year. This result also outperformed the analysts’ consensus estimates by 2.48%.

Turning to the bottom line, Broadcom reported quarterly non-GAAP diluted earnings of $9.07 per share. That’s a 37% improvement over the prior-year quarter’s result, as well as 4.01% better than what the analysts had expected.

Broadcom President and CEO Hock Tan observed “strength in networking and server storage” during the second quarter, while forecasting that the company’s revenue momentum will “continue into the third quarter.” More specifically, Broadcom guided for third-quarter revenue of roughly $8.4 billion, which would translate to 24% year-over-year revenue growth.

Sealing the Deal

Not convinced yet? Maybe you’re a tough customer and need more stats before you’re ready to buy Broadcom stock. No problem: during the second quarter, Broadcom recorded an astounding $4.158 billion of free cash flow from operations, and returned a very generous $4.5 billion to the company’s shareholders. What more could anyone ask for?

Yet, believe it or not, there’s still more to the story. May 26 was a day for the history books as Broadcom not only reported the aforementioned quarterly results, but also announced what might be considered 2022’s most significant technology-market acquisition.

In a bombshell announcement, Broadcom disclosed a $61 billion deal in which the company will buy out VMware (VMW) in a cash-and-stock transaction. Based in California, VMware provides cloud infrastructure and management, networking, security, and more.

Now, here’s something you probably didn’t expect. After the transaction is finalized, the Broadcom Software Group will “rebrand and operate as VMware,” not the other way around. Don’t get the wrong idea, though, as Broadcom is still the acquiring company in this scenario.

The enormity of this buyout cannot be overstated. Broadcom isn’t exaggerating when it claims that the VMware acquisition will advance Broadcom’s strategy to “build the world’s leading infrastructure technology company.” Sure, a $61 billion deal isn’t cheap, but Broadcom is targeting around $8.5 billion of added pro forma EBITDA from the VMware buyout within three years after the deal has been finalized.

In other words, the deal will be big but the benefits will be bigger. As Futurum Research analyst Daniel Newman put it, with the acquisition of VMware, Broadcom will instantly be validated as a major software player.

“Having something like VMware… will have a significant number of doors open that their current portfolio probably doesn’t open for them,” Newman also posited.

As for VMware’s current shareholders, Broadcom expects that they’ll be able to “receive either $142.50 in cash or 0.2520 shares of Broadcom common stock for each VMware share.”

Wall Street’s Take

According to TipRanks’ analyst rating consensus, AVGO is a Strong Buy, based on 15 unanimous Buy ratings. The average Broadcom price target is $710, implying 21.73% upside potential.

The Takeaway

With the VMware deal, Broadcom’s investors will effectively get exposure to two leading technology firms for the price of one. Besides, Broadcom’s financial figures are already impressive on their own. The VMware acquisition should only add to Broadcom’s considerable value proposition.

Furthermore, Broadcom stock isn’t unreasonably valued, and the company offers a decent dividend. Knowing all of this, informed investors should see a rare buying opportunity now with Broadcom stock, and could anticipate a share-price run to $700 and beyond.

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