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Broadcom Still A Relative Bargain In Semis

Jun. 09, 2020 7:53 AM ETBroadcom Inc. (AVGO)AAPL, IPHI, QCOM15 Comments
Stephen Simpson profile picture
Stephen Simpson
18.94K Followers

Summary

  • Broadcom did a little better than expected in fiscal Q2, helped by ongoing strength in the data center.
  • The future of the wireless business may still be in question, but Apple should drive some incremental growth late in FY'20, and I believe Broadcom has secured its margins.
  • Wired markets like data centers remain a key growth opportunity, with Broadcom looking to extend its leadership in switch silicon and continuing growing its custom ASIC business.
  • Mid-single-digit revenue growth and high single-digit FCF growth still support relatively attractive returns from these shares.

Likely due in part to its “neither fish nor fowl” mix of semiconductor and software businesses, Broadcom (NASDAQ:AVGO) continues to trade at a discount to my estimate of fair value. Broadcom’s diverse business has held up relatively well, but the shares have nevertheless continued to modestly lag large comps like Texas Instruments (TXN) and the broader chip sector.

The biggest concern I have with Broadcom is that the company’s decision to view itself (and operate) as a more diverse enterprise technology company will continue to drive a discount to fair value relative to what discounted cash flow and margins would otherwise support. That’s an “is what it is” risk with this name now, but one that I believe is offset by a leading market position in almost a dozen sizable markets, as well as excellent margins and the prospect of double-digit dividend growth in the coming years.

Modest Outperformance In Fiscal Q2

Relative to revised expectations, Broadcom’s fiscal second quarter was a little better than expected. Revenue was almost 1% better, with both semiconductors and software outperforming. Margins were also a little better, with a small beat at the gross margin line and a roughly 40bp beat at the operating margin line.

Revenue rose 4% from the prior year and fell 2% from the prior quarter, with the core semiconductor business (70% of revenue) seeing a 2% yoy and 4% qoq decline. While networking remained strong (up 11% qoq) and the industrial business was stronger than many peers (up 13% qoq), server/storage/connectivity and wireless both saw mid-teens declines on various headwinds in those businesses. Infrastructure (software, mostly) was up 21% yoy and 3% qoq, with the Brocade business up 11% qoq and double-digit growth in core account bookings.

Gross margin improved over a point from the prior year and 10bp

This article was written by

Stephen Simpson profile picture
18.94K Followers
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I am/we are long AVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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