The long-awaited merger between top semiconductor giant Broadcom (AVGO +4.90%) and cloud computing software pillar VMware (VMW +0.00%) is almost complete. Broadcom management has said it expects the tie-up to be finished by the end of October 2023, pending final regulatory sign-off in China.
Once complete, VMware will transform Broadcom from a primarily semiconductor business into one balanced between hardware and software -- and one of the largest enterprise software businesses out there. Is Broadcom stock a buy now?
Broadcom to supercharge its software operation
Even ahead of what will be about a $70 billion takeover of VMware, which should be the largest technology acquisition ever, Broadcom is already a sizable software operation. Though just about 20% of total revenue, Broadcom software is expected to haul in $7.6 billion in fiscal 2023. It's made numerous other purchases of enterprise software companies, building a suite of cloud management and security services to add to its giant semiconductor design and manufacturing prowess.
- Brocade (acquired in 2017): network storage software
- CA Technologies (acquired in 2018): IT management software for cloud automation
- Symantec (acquired in 2019): enterprise security software
VMware's $13.6 billion in trailing-12-month revenue will supercharge Broadcom's software business, boosting total Broadcom enterprise software revenue to well over $20 billion annually. Once combined, Broadcom will be a nearly half-semiconductor, half-software giant. That is, of course, if Broadcom decides not to spin off, sell, or close down any of VMware's services. It's a strategy it's taken before, like when it closed non-strategic Symantec accounts in the wake of its purchase in 2019 (an effect that smaller upstarts like CrowdStrike called out as benefiting its customer acquisition efforts at the time).
A top enterprise software investment?
Ahead of a tie-up with VMware, Broadcom is already showing off its work in leading software development. For example, it recently announced an expanded partnership with Alphabet's Google Cloud to use generative artificial intelligence (AI) tools in its cybersecurity. In exchange, Google Cloud is using Symantec data to help train its AI models.
In a separate event, Broadcom also said that courts in Germany also upheld its patents in video streaming encoding and handed Netflix a cease-and-desist order for using this tech in building its ultra-high-definition video streaming in Germany.
Indeed, it's impossible to separate chips from the software architecture they operate. Broadcom is a powerhouse that combines both and offers a unique investment.
But is the stock a buy now? Adding VMware's trailing-12-month free cash flow to Broadcom's, the combined company would trade today for just under 19 times free cash flow. Broadcom thinks it will be able to boost VMware's profit margins in the coming years. All that aside, though, Broadcom actually trades for a compelling valuation compared to its fellow enterprise software peers, assuming Broadcom overall can continue to grow at a modest mid-single-digit percentage.
Data by YCharts.
Broadcom stock has advanced in grandiose style this year ahead of the VMware merger. The stock is up 46% so far in 2023 alone. Nevertheless, this top stock still looks like a great long-term investment -- both as a top semiconductor and as a cloud computing one.
