Broadcom (NASDAQ:AVGO) is one of the world's best run semiconductor companies. The company has strong market share and technology positions across most, if not all, of the areas it serves, and that strength has paid off in the form of high revenue, robust gross margin, and a flood of free cash flow that it dutifully returns to its shareholders.
If you're thinking of investing in Broadcom, you need a good understanding of what markets the company plays in and how each of those markets contributes to the business. Let's dive in.
Breaking down the business
In its financial reporting, Broadcom breaks its business into four major segments: wired infrastructure, wireless communications, enterprise storage, and industrial and other.
The largest segment in fiscal 2018 was wired infrastructure, generating 42% of the company's $20.86 billion in revenue. This segment, Broadcom explains, builds products for a range of applications, including set-top boxes, broadband access gateways, and various components for data center, telecom, and embedded network infrastructure.
However, despite being Broadcom's biggest business, it was also the company's slowest grower in fiscal 2018, with sales rising just 1% year over year.
The second largest segment is the wireless chip business, which builds a range of wireless connectivity components mainly for the smartphone market. This segment made up 31% of the company's revenue in fiscal 2018, and the bulk of that amount -- more than 80% -- came from a single customer: Apple (NASDAQ:AAPL). This segment enjoyed revenue growth of 20% last year.
Next up is the company's enterprise storage business. This segment builds and sells products that go into servers and storage systems, as well as hard disk and solid state drives. The segment saw a 67% revenue boost from the prior year, with a large portion of that growth coming from the company's purchase of Brocade. This segment made up 22% of Broadcom's fiscal 2018 sales.
The last of the company's reporting segments in fiscal 2018 was industrial and other, which the company says serves a number of applications, including factory automation, displays and lighting, motor controls, and in-vehicle infotainment systems. This was the smallest of Broadcom's businesses, generating just 5% of sales. It did, however, deliver 14% revenue growth during the year.
On a non-GAAP basis, Broadcom's fiscal 2018 gross margin was 66.8%, the best within the semiconductor industry. The company is also good about keeping its operating expenses in check, coming in at $3.51 billion that year -- just 16.8% of the company's total revenue.
These metrics tell us two things. First, the high gross margin suggests that the company's products have good cost structures and offer competitive performance and features. Second, low operating expenses as a percentage of revenue suggest that the company is efficiently run, with little fat in the company's spending.
All of this translated into about $9.4 billion in non-GAAP net income.
Check out the latest Broadcom earnings call transcript.
Broadcom's business in fiscal 2018 was extremely robust, characterized by solid revenue and profit growth. The company's free cash flow growth was also impressive, which helped fuel a 51% boost in the dividend.
For fiscal 2019, Broadcom is looking for another solid year. Guidance for the year calls for revenue of $24.5 billion, up about 17.4%, although that bakes in revenue from the company's acquisition of mainframe software specialist CA Technologies.
Current analyst consensus calls for revenue of $24.41 billion, slightly below Broadcom's guidance. In terms of non-GAAP earnings per share (EPS), analysts expect the company to churn out $22.83, up from $20.82 in the prior year.
This is a large, profitable, efficient, and diversified business that trades at 11.9 times analysts' fiscal 2019 EPS expectations and less than 10.4 times their fiscal 2020 EPS outlooks. In addition to being a cheap stock, it also pays a generous dividend, yielding 3.8% as of this writing.
Broadcom is a stock I'm going to keep on my watch list.