On Feb. 1, 2016, the Singapore-based chipmaker Avago Technologies closed its acquisition of the American chipmaker Broadcom (AVGO 3.84%) and inherited its name. The $37 billion merger was the largest chip deal in history.
If you had invested $2,000 in the "new" Broadcom on that fateful day, your investment would have grown to about $19,600 over the past eight years. If you had reinvested your dividends, your stake would have blossomed to about $25,000. Let's see how Broadcom generated those multibagger gains -- and if it still has room to run over the next few years.
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How did the "new" Broadcom impress the bulls?
Avago had already acquired a long list of companies to expand its selection of wireless, optical, and data storage chips before it added the original Broadcom's mobile, networking, wireless, and industrial chips to its portfolio.
After closing that deal, Broadcom launched a hostile takeover bid for Qualcomm, one of the world's largest mobile chipmakers, for $130 billion in 2017. However, the Trump administration blocked the deal in 2018 due to national security concerns. That setback drove Broadcom to relocate its headquarters to the U.S. later that year.
Broadcom subsequently expanded into the infrastructure software market by acquiring CA Technologies in 2018, Symantec's enterprise security unit in 2019, and the cloud software giant VMware in 2023. All of those acquisitions diversified its business away from the cyclical semiconductor market and reduced its dependence on Apple -- which still accounted for 20% of its revenue in the last two fiscal years.
From fiscal 2016 to fiscal 2023 (which ended last October), Broadcom's adjusted revenue increased at a compound annual growth rate (CAGR) of 15%, its annual adjusted gross margin expanded from 60.5% to 74.7%, and its adjusted earnings per share (EPS) rose at a CAGR of 21%. Those robust growth rates indicated its blend of organic and inorganic growth strategies was paying off, and the bulls rushed to the stock.
Yet investors shouldn't overlook Broadcom's two biggest weaknesses. First, it increased its share count by nearly 20% over the past eight years as it issued more shares to fund its acquisitions. Second, its shopping spree boosted its debt-to-equity ratio from 1.3 at the end of fiscal 2016 to 1.5 in the first quarter of fiscal 2024.
What's next for Broadcom?
In fiscal 2023, Broadcom generated 79% of its revenue from its semiconductor solutions and the remaining 21% from its infrastructure software business. However, it expects its acquisition of VMware, which closed last November, to expand its infrastructure software business to about half of its total revenue in fiscal 2024 and beyond.
Broadcom will also likely profit from the expansion of the AI market as companies upgrade their data center and infrastructure chips. In the first quarter of fiscal 2024, the company's AI chip revenue quadrupled year over year to $2.3 billion (31% of its semiconductor revenue and 19% of its total revenue) and offset its slower sales of enterprise and telecom chips. It expects AI chips to account for 35% of its semiconductor revenue for the full year.
Apple also signed a new "multibillion-dollar agreement" to buy Broadcom's 5G radio frequency components and other wireless connectivity components last May. Therefore, Broadcom won't lose its top customer anytime soon -- even as the expansion of its software business gradually reduces the iPhone maker's weight on its top line.
Analysts expect Broadcom's revenue and adjusted EPS to rise 41% and 11%, respectively, in fiscal 2024 as it integrates VMware. For fiscal 2025, they expect its revenue and adjusted EPS to grow 13% and 21%, respectively, as it laps that acquisition. Its stock still trades at a reasonable 29 times forward earnings. Broadcom's forward dividend yield of 1.6% might seem low, but it still has plenty of room for future hikes because it only spent 44% of its free cash flow (FCF) on its payout over the past 12 months. It's also raised that dividend annually for the past 14 years.
Does Broadcom still have room to run?
Broadcom is already one of the world's largest chipmakers with a market cap of $630 billion, but it's still well positioned to profit from the long-term growth of the semiconductor, cloud, AI, and cybersecurity markets. It might not replicate its massive gains from the past eight years anytime soon, but it still has plenty of room to run.
