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Stock Analyst Update

Broadcom: Healthy Results but Mum on Qualcomm

We estimate that Broadcom can raise its bid price as high as $85 per share and still find the acquisition to be quite accretive.

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 Broadcom Limited (AVGO) reported solid fiscal fourth-quarter earnings and provided investors with a forecast for the January quarter that was relatively in line with our expectations after factoring in the firm's recent acquisition of Brocade. Business conditions still appear quite healthy across most end markets, as the company will continue to reap the benefits of content gains within Apple's latest iPhone series. Longer term, with Brocade in the fold, we're encouraged that the company also raised a couple of its long-term profitability targets. We will maintain our $227 fair value estimate for narrow-moat Broadcom and shares still appear about 20% overvalued to us. That said, our valuation does not consider any potential contribution from Qualcomm, which the firm attempted to buy for $70 per share in early November. Management said little on the call about Qualcomm, but we continue to believe that such a deal would be materially accretive to Broadcom. We estimate that Broadcom can raise its bid price as high as $85 per share and still find the acquisition to be quite accretive. Along these lines, Broadcom's stock price in the $270 range appears reasonable to us only if it can in fact close the deal to buy Qualcomm, but looks pricey on a standalone basis.

Broadcom's revenue in the October quarter was $4.84 billion, up 9% sequentially and 17% year over year and ahead of the midpoint of the firm's previous guidance of $4.80 billion as discussed in early September. Wireless revenue was the bright spot, up 33% year over year and up 40% sequentially, again thanks to Broadcom's content gains within Apple's latest iPhones. Enterprise storage revenue appears to be cooling off, particularly for chips used in storage hard-disk drives, with sales down 12% sequentially but still up 15% year over year. Meanwhile, the firm's largest segment, Wired Infrastructure, saw sales rise 3% year over year but were down 3% sequentially.

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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