What happened
Shares of chip design giant Broadcom (AVGO 1.74%) slumped 16% in June 2022, according to data from S&P Global Market Intelligence. Semiconductor stocks in particular have been blasted as worries mount about a possible recession. But Broadcom is a stalwart among chip companies and is outperforming many of its peers. As of this writing, its stock is down 28% so far in 2022. By comparison, the S&P 500 and Nasdaq Composite indexes are down a respective 20% and 29%.
NASDAQ: AVGO
Key Data Points
So what
A myriad of factors are weighing on Broadcom and friends. The U.S. Federal Reserve is hiking interest rates in an attempt to beat back inflation, and higher rates put downward pressure on stocks. Reports are also mounting that there's an excess of consumer electronics on the market right now after two years of heavy spending on stay-at-home and work-from-home devices. Micron Technology was the latest to confirm this with weak financial guidance for the summer quarter. Since Broadcom is a top supplier of consumer electronic circuitry, Micron's guidance could indicate Broadcom is in for some turbulence as well.
Additionally, Broadcom also announced at the end of May it is going to attempt to acquire cloud computing infrastructure company VMware for a whopping $61 billion -- which would be among the biggest takeovers ever in the tech world. Adding VMWare to its arsenal of chips and enterprise software would seriously augment Broadcom's already sprawling operation, but the amount of effort involved in pulling off the acquisition was a likely additional reason for the stock's decline last month.
Now what
Taking over VMware is going to take some time, if it happens at all. Regulators in the U.S., European Union, China, and elsewhere are likely to have scruples with allowing such a big shakeup in the business world -- especially one that has the potential to impact the smartphone, cloud computing, automotive, and IT infrastructure industries to such a degree as this one. Stay tuned for details.
In the meantime, investors should focus on Broadcom's financial results. The last quarter was a good one, and management had said to expect year-over-year revenue growth of about 24% for its summer quarter ending in July 2022.
However, as other chip companies have demonstrated as of late, the economy is changing fast, and Broadcom could also be in for a slowdown later this year. Shares trade for 14 times trailing-12-month free cash flow and yield 3.3% a year as of this writing. Despite uncertainties, Broadcom is worth a look for investors seeking business stability and dividend income.
