Broadcom's (AVGO +5.69%) stock rose about 3.8% over the past 12 months. During that same period, the S&P 500 declined 9.3%, and the PHLX Semiconductor Sector index lost 13.2% of its value.
Broadcom outperformed the market and many of its industry peers for four reasons. It wasn't heavily exposed to the declining PC market, it generated stable revenues from its infrastructure-oriented businesses, its stock was cheap, and it paid a high dividend. Those strengths made it a good safe haven play as rising interest rates crushed the tech sector's pricier and more speculative stocks. But will Broadcom continue to outperform the market over the next 12 months?
Image source: Getty Images.
Understanding Broadcom's business
Avago Technologies, a chipmaker originally based in Singapore, acquired the original Broadcom in 2016. It subsequently adopted its name and relocated its headquarters to the United States in 2018. The "new" Broadcom continued to expand by buying the network gear maker Brocade in 2017, the software company CA Technologies in 2018, and Symantec's enterprise security business in 2019. It nearly bought Qualcomm via a hostile takeover which was blocked by the U.S. government in 2018, and it's in the process of acquiring the cloud software giant VMware (VMW +0.00%).
NASDAQ: AVGO
Key Data Points
Broadcom's semiconductor business generated 78% of its revenue in fiscal 2022 (which ended last October), and it produces a wide range of chips for the data center, networking, broadband, wireless, storage, and industrial markets. Its largest client is Apple (AAPL +0.40%), which installs its Wi-Fi and Bluetooth combo chips in its iPhones and other hardware devices. Apple accounted for about 20% of Broadcom's total revenue in both fiscal 2021 and fiscal 2022, but it's widely expected to replace Broadcom's chips with its own in-house silicon by 2025.
Broadcom is a "fabless" chipmaker that outsources the production of its chips to third-party foundries like Taiwan Semiconductor Manufacturing. Therefore, it probably won't see much of a benefit from the CHIPS and Science Act's subsidies and tax breaks for integrated device manufacturers (IDMs) like Intel and Texas Instruments, which manufacture their own chips domestically.
Broadcom's infrastructure software business (which generated the remaining 22% of its revenue in fiscal 2022) was mainly built on its acquisitions of CA and Symantec's security business. The expansion of that business, which will accelerate significantly if it closes its takeover of VMware this year, reduces its overall dependence on Apple and the cyclical chip market.
How fast is Broadcom growing?
Broadcom's revenue rose 21% in fiscal 2022 -- driven by robust demand for fresh chips across the hyperscale, service provider, enterprise, and wireless markets -- and accelerated from its 15% growth in fiscal 2021.
During Broadcom's fourth-quarter conference call in December, CEO Hock Tan said that "in contrast to weak consumer electronics spending today and despite concerns of a global recession, we believe overall infrastructure spending remains strong, and we continue to experience sustained demand in most of our end markets." That's why Broadcom generated such stable sales growth across both of its main businesses over the past year.
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Semiconductor Solutions revenue growth (YOY) |
17% |
20% |
29% |
32% |
26% |
|
Infrastructure Software revenue growth (YOY) |
8% |
5% |
5% |
5% |
4% |
|
Total revenue growth (YOY) |
15% |
16% |
23% |
25% |
21% |
Data source: Broadcom. YOY = Year over year.
Broadcom's scale also enables it to grow its margins consistently. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 27% in fiscal 2022, and its adjusted EBITDA margin expanded from 60.4% to 63.3%. Its annual free cash flow (FCF) increased 22% to $16.3 billion, which also boosted its FCF margin from 48.5% to 49.1%.
Where will Broadcom's stock be in a year?
For the first quarter of fiscal 2023, Broadcom expects its revenue to rise 15% year over year with an adjusted EBITDA margin of 63%. For the full year, analysts expect its revenue and adjusted EBITDA to both rise 6%, and for its adjusted earnings per share (EPS) to grow 8%.
Broadcom's chip sales to most of its enterprise-facing markets should remain stable, but slower sales of iPhones and macro headwinds for its infrastructure software business could offset some of those gains.
However, analysts still haven't factored in Broadcom's potential acquisition of VMware -- which would cause its reported revenue to rise by double digits again in 2023 or 2024 -- into their near-term forecasts yet. Broadcom expects to close that $61 billion deal this year, but it still needs to resolve a new antitrust probe in Europe and gain regulatory approvals in other key markets before that happens.
Closing the VMware deal would certainly be a bullish catalyst for Broadcom since it would boost its near-term revenue, breathe life into its slower-growth infrastructure software unit, and reduce its long-term dependence on Apple. But even if it doesn't close that massive deal this year, Broadcom's stock is still cheap at 14 times forward earnings, and it pays a high forward dividend yield of 3.1%.
I'm not certain if Broadcom will outperform the market again in 2023, but I believe it will either hold steady or rise gradually as more investors appreciate the scale and quality of its core businesses.
