Share prices of chip giant Broadcom (AVGO -3.10%) have been hit by the recent sell-off in tech stocks. The stock price is down over 10% from all-time highs. Up some 40% from pre-pandemic levels, though, Broadcom stock is still a long-term growth winner.
And after the company's fiscal 2021 first-quarter report (the three months ended Jan. 31, 2021), a global semiconductor shortage bodes well for Broadcom's trajectory the rest of this year and underpins its lucrative dividend payment. Here's why the stock looks like a buy after the sell-off.
Plenty of growth ahead for Broadcom
Broadcom reported that its revenue advanced 14% year over year in Q1 to $6.66 billion. Free cash flow increased 35% to $3 billion.
A rebound in global semiconductor demand (following effects from the U.S.-China trade war that started a couple of years ago) was the primary reason for the jump. Chip revenue was $4.91 billion, up 17% from the prior year, representing three-quarters of the revenue total. Broadcom CEO Hock Tan said on the earnings call he expects a similar growth rate for the company's bread-and-butter segment through the rest of 2021 as it laps post-trade war and pandemic effects from a year ago.
But a surge in economic activity after global lockdowns last year is wreaking havoc on some semiconductor companies. Broadcom, for its part, started taking a hard look at customer demand last spring to filter out who had real customer demand and who was trying to stock up on excess inventory. As a result, Broadcom said its supply chain isn't getting constricted like some other companies are reporting. And as it separates the most urgent needs from those customers that can wait, Broadcom has a long pipeline of demand ahead of it. Customer bookings for hardware were up 63% in Q1, driven by wireless chips for smartphones and Wi-Fi 6-enabled routers, as well as data center upgrades as companies rely more heavily on cloud computing.
On the software front, Q1 was the first year-over-year comparable period after the acquisition of Symantec's enterprise security segment. Software revenue increased 5% year over year to $1.75 billion and is a highly profitable add-on to the company's wireless and networking hardware business. And as Broadcom's sales grow this year, free cash flow is poised to continue rising at an even faster pace as the company reaches a more efficient scale.
A value on a top dividend stock
After the Q1 report, Broadcom trades for just under 15 times trailing 12-month free cash flow. Given the growth outlook for 2021, I say the stock is a pretty good deal right now as this leading company benefits from a surge in global demand.
Plus, there's that dividend payment, currently yielding 3.2% a year. Payment of the dividend used up just over half of free cash flow generated in the last quarter. That leaves plenty of excess cash for Broadcom to increase its shareholder payday over time and manage its debt ($41.1 billion at the end of January, offset by $9.55 billion in cash and equivalents on the balance sheet). This is a rock-solid dividend, with growth prospects in the works as new smartphones and networking equipment roll out this year in the wake of the pandemic.
Given the strong demand for chips, a steadily growing infrastructure software business riding sidecar, and even faster-growing free cash flow, Broadcom looks like a top buy among semiconductor stocks right now.