Stock Spotlight

Don't forget Broadcom

 

Everybody’s talking about Nvidia ($118; NVDA), the $3 trillion baby. But investors seeking semiconductor exposure shouldn’t sleep on Broadcom ($163; AVGO). With a stock-market value of $771 billion, nearly three times that of its next largest U.S. rival, Broadcom would attract more attention if Nvidia cast a smaller shadow.

Broadcom focuses on analog semiconductors, particularly radiofrequency and optoelectronics. Sales of its switching platforms jumped 44% in the April quarter because of the data-center build-out. Broadcom should also benefit from increased demand for ethernet switches, a key to AI computing. Combine Broadcom’s networking chips with its strong presence in cloud infrastructure, and the company seems well positioned to grab a big stake when the AI-as-a-service trend picks up.

Broadcom, which plans a 10-for1 stock split in mid-July, is a Focus List Buy.

The whole package

Broadcom has put together an impressive — and remarkably consistent — growth history, with annualized growth of more than 30% in sales, per-share profits, and operating and free cash flow over the last decade. Sales, profits, and operating cash flow increased in 10 consecutive years, while free cash flow rose in each of the last nine. Analysts expect growth to continue in coming years. The consensus projects profit growth of 13% this year on merger-driven 44% sales growth, followed by 26% higher profits and 16% higher sales in fiscal 2025.

In the fiscal year ended October 2023, infrastructure software accounted for 21% of revenue, with the rest from traditional semiconductors. Software could vault to roughly 40% of revenue this year as the company digests the November acquisition of VMware, a developer of cloud-computing and virtualization solutions. The software business should boost both growth and profit margins.

The shares jumped last month after exceeding sales and profit expectations for the April quarter and releasing encouraging guidance. Broadcom expects revenue of $51 billion for the year, up from an earlier target of $50 billion, bolstered by $11 billion in sales of AI chips.

It’s tough to call Broadcom a value stock, but when it comes to valuation, context matters. Broadcom trades at 35 times projected earnings of $47.83 per share for fiscal 2024, 13% below the industry median. The stock’s price/earnings-to-growth (PEG) ratio of 1.8 is 14% below the industry median.

Rising dividend

The dividend has increased every year since its initiation in fiscal 2011, most recently a 14% hike in December. Broadcom’s indicated year-ahead payout of $21 per share accounts for 44% of expected earnings, leaving room for additional increases. The shares yield 1.3%.

Broadcom Inc., 3421 Hillview Ave., Palo Alto, CA 94304, (650) 427-8000, www.broadcom.com.

 

 

 

 

Quadrix Scores

 

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