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Is Broadcom Stock a Buy?

By Nicholas Rossolillo - Aug 20, 2020 at 8:44AM

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Networking infrastructure is in high demand, and this high-yield dividend stock is a decent play.

Shares of networking semiconductor maker Broadcom (AVGO 2.35%) have had a wild year. After halving in value at one point back in late March, the stock has come roaring back to all-time highs. During its fiscal 2020 second-quarter earnings update (the three months ended May 3, 2020), the networking giant reported having such strong demand for some of its chips it was having difficulty keeping up. Besides keeping its long-term growth trajectory headed in the right direction, the report offered reassurance that the company's current 4% dividend yield is also on solid footing.

The indication is Broadcom did just fine during the height of the lockdown to halt the spread of the coronavirus. The company will release another update on its operations on Sept. 3. In the meantime, is it a buy?  

Icons containing illustrations of devices and a lock button being pressed by someone in the background.

Image source: Getty Images.

More clouds (of the digital variety) in the forecast

As with most other parts of the semiconductor industry, a sales slump that started in 2018 was just giving way to a new wave of demand when the coronavirus hit. However, rather than taking chip sales down another notch, something surprising happened: Faced with continuity crises in the midst of the lockdown, a flood of organizations started ordering equipment to keep their workforces employed. 

For Broadcom, that equated to its semiconductor bread-and-butter improving to just a 2% year-over-year decline during its second quarter, offset by a 21% gain in infrastructure software (assets acquired from the Symantec enterprise cybersecurity segment, CA Technologies, and Brocade over the last few years). In total, the company reported a 4% revenue increase in its last quarter to $5.74 billion, and the networking infrastructure giant remains very profitable even during uncertain times. Free cash flow (revenue less cash operating and capital expenses and from which dividends are paid) also continues to rise and handily covers the shareholder payout.

Metric

First Half Fiscal 2020

First Half Fiscal 2019

Change

Revenue

$11.6 billion

$11.3 billion

2.7%

Operating income

$1.48 billion

$1.53 billion

(3.3%)

Net income

$799 million

$1.16 billion

(31%)

Free cash flow

$5.28 billion

$4.58 billion

15%

Total dividends paid

$2.75 billion

$2.12 billion

30%

Data source: Broadcom.  

The current year hasn't been completely smooth sailing of course. Not all of Broadcom's customers are faring as well as others (like the automotive and smartphone industries, for example). Nevertheless, consumer spending will eventually bounce back, and Broadcom's network hardware business paired with its more-recently purchased but high-profit margin network management software continues to benefit from the growth of the cloud. With cloud computing expansion expected to continue for the foreseeable future, Broadcom's slow-and-steady trajectory looks promising. 

New competition, new debt, same old story

I like Broadcom's takeover of infrastructure software to complement its hardware business. It helps create a reason for customers to return, as there is no shortage of competitors gunning for its networking empire. According to data compiled by AI-research tool Noonum, hardware designers like Marvell Technology (MRVL 3.07%), Skyworks Solutions (SWKS 2.87%), and even NVIDIA (NVDA 4.28%) via its Mellanox acquisition are major players in the same space. And on the cloud software side, the list is even longer. Combining the businesses into one complete package should help Broadcom stave off its many peers.

However, to accomplish this feat, Broadcom has had to take on substantial debt. At the beginning of May, Broadcom had $9.21 billion in cash and equivalents on the books, but $45.8 billion in debt. Managing its sizable liabilities will be key in the coming years as it digests its software prizes. The good news is that even with the extra interest expense, Broadcom has ample ability to pay down the burden over time.  

As of this writing, Broadcom trades for 13.8 times trailing 12-month free cash flow. Thus, even after a big rally from March lows (when shares traded for a ridiculously cheap price), this semiconductor stock is still worthy of consideration. Its massive networking empire is a stable and resilient business -- although the big dip in stock price during the market meltdown early in 2020 is a reminder that stable share prices simply aren't to be expected. Nevertheless, for investors who are looking to generate income from their portfolio paired with a little growth along the way, Broadcom is a decent pick.

Nicholas Rossolillo and his clients own shares of Broadcom Ltd, NVIDIA, and Skyworks Solutions. The Motley Fool owns shares of and recommends NVIDIA and Skyworks Solutions. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$558.23 (2.35%) $12.80
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$187.09 (4.28%) $7.67
Marvell Technology Group Ltd. Stock Quote
Marvell Technology Group Ltd.
MRVL
$55.36 (3.07%) $1.65
Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$113.41 (2.87%) $3.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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