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This Tech Stock Is Built for Long-Term Growth

By Harsh Chauhan – Sep 14, 2021 at 6:51AM

Key Points

  • Broadcom recently delivered better-than-expected results and robust guidance.
  • The rollout of 5G and high-speed broadband networks, as well as the booming demand for 5G smartphones, should ensure long-term growth for this company.
  • The stock is trading at an attractive valuation.

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The deployment of faster networks around the globe will be a secular tailwind for this company.

Broadcom (AVGO 5.68%) benefits big time from the growing demand for semiconductors across multiple verticals, including wireless, broadband, networking, industrial, and server storage. So it wasn't surprising to see the chipmaker recently deliver robust third-quarter results on Sept. 2.

Broadcom blew past Wall Street's expectations with adjusted earnings of $6.96 per share on revenue of $6.78 billion in the third quarter of fiscal 2021. That's up 29% and 16%, respectively, from the year-ago period. Analysts were looking for adjusted earnings of $6.85 per share and roughly $6.76 billion in revenue, but impressive growth in Broadcom's semiconductor solutions business led to better-than-expected results.

Let's look closely at Broadcom's performance last quarter and check why it remains an enticing buy right now.

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Broadcom has multiple catalysts

The semiconductor solutions business produced 74% of Broadcom's total Q3 revenue. The segment's revenue increased 19% year-over-year during the quarter to a shade over $5 billion, outpacing the company's overall growth.

Broadcom management pointed out on the earnings call that the company saw stronger-than-expected growth in the networking vertical, while semiconductor demand in the wireless and the broadband segments was strong enough for the company to record solid double-digit growth.

Specifically, Broadcom's networking revenue was up 19% year-over-year to $1.8 billion, well above the low-double-digit growth that the company had forecasted. Networking produced 36% of the chipmaker's semiconductor revenue last quarter, with Broadcom crediting the 5G network expansion and market share gains within the data center ethernet network interface controller space.

Broadcom now believes that its networking business will enjoy a new set of catalysts from the current quarter. The company expects its cloud customers to upgrade to its next-generation 800-gigabit ethernet switches. The 800G ethernet switching market is still in the early stages of growth -- according to the Dell'Oro Group, the adoption of 800G data center switches will be faster than the 400G switches, and the firm adds that 800G ports will account for a fourth of all data center switches by 2025.

Similarly, 5G wireless network infrastructure investments are expected to increase from $13.7 billion last year to $23.2 billion next year as per Gartner. As a result, demand for Broadcom's mobile networking switches can be anticipated to improve. The company offers an end-to-end switching portfolio for 5G mobile networks, and has struck deals with major networking providers such as Nokia, so it wouldn't be surprising to see the company clock secular growth in this market as more 5G networks are built around the globe.

The broadband segment is also sitting on secular tailwinds, such as the deployments of WiFi 6 access gateways and next-generation fiber networks. Broadcom's broadband revenue was up 23% year-over-year last quarter to $910 million, with 2x growth in WiFi deployments driving growth. This is a fast-growing space that's expected to clock 28% annual growth through 2025, according to market research firm TechNavio's estimates.

Broadcom also sees "service providers like AT&T, British Telecom, and even Deutsche Telekom, deploying" higher volumes of next-generation last-mile fiber connectivity to homes in the U.S. and internationally. These tailwinds should pave the way for growth in Broadcom's broadband business for a long time to come.

Finally, the wireless vertical is reaping the rewards of the boom in 5G smartphones. Broadcom saw 35% year-over-year growth in wireless revenue last quarter to $1.4 billion. The wireless segment accounted for 29% of the semiconductor business' revenue. Broadcom expects wireless revenue to increase 25% year-over-year this quarter thanks to the "launch of next-generation smartphones."

Broadcom supplies wireless chips to Apple, so it is not surprising to see why the former anticipates strong growth in wireless revenue once again this quarter. Given that the 5G smartphone market is likely to keep growing at a terrific pace in the coming years, Broadcom's wireless business looks poised to be another secular tailwind for the company.

Why the stock is still a good buy

Broadcom's outlook for the current quarter indicates that the company is on track to sustain its impressive growth. The chipmaker expects $7.35 billion in revenue this quarter, which would be a jump of nearly 15% over the year-ago period's sales of $6.46 billion.

Given the multi-year catalysts Broadcom is sitting on, it should be able to keep growing at impressive rates in the coming years.

AVGO Revenue Estimates for Current Fiscal Year Chart

AVGO Revenue Estimates for Current Fiscal Year data by YCharts

That's why investors looking to add a strong tech stock to their portfolios should consider buying Broadcom right now. The stock is trading at just 16.6 times forward earnings, which is a discount compared to the S&P 500's average forward earnings multiple of 22.2.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Broadcom Ltd and Gartner and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Broadcom Ltd Stock Quote
Broadcom Ltd
$551.03 (5.68%) $29.64
Apple Stock Quote
$148.03 (4.86%) $6.86
Nokia Oyj Stock Quote
Nokia Oyj
$4.93 (4.01%) $0.19
Gartner Stock Quote
$350.37 (3.03%) $10.29

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