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Stock Analyst Update

Broadcom Looks Attractive

The narrow-moat firm is poised to capitalize on its leadership positions to drive future growth and potential accretive acquisitions.


 Broadcom (AVGO) reported in line fiscal second-quarter results while providing a third-quarter outlook consistent with its preliminary revenue guidance from April 30. The firm’s wireless segment was negatively impacted by a sharp drop in Apple iPhone channel shipments, modestly offset by increased product shipments to Samsung for its latest Galaxy S9 smartphone. In contrast, Broadcom’s other three business segments exhibited solid sequential growth, illustrating the breadth of the company’s offerings. We remain positive on narrow-moat Broadcom as it is poised to capitalize on its leadership positions to drive future growth and potential accretive acquisitions. Consequently, we view shares as attractive relative to our unchanged $300 fair value estimate.

Second-quarter revenue was $5.0 billion, down 6% sequentially due to the aforementioned weakness in wireless, which fell 41% from the prior quarter to $1.3 billion. Wired infrastructure rose 22% sequentially to $2.3 billion, reflecting robust demand from cloud data centers as well as a seasonal recovery in broadband access. Enterprise storage sales were up 17% quarter-over-quarter to $1.2 billion, with $400 million in revenue derived from the recently acquired Brocade fiber channel switch business. We note this segment would still have exhibited year-over-year growth sans Brocade. Broadcom’s adjusted gross margins were 66.6%, up 180 basis points sequentially due to a more favorable product mix with higher wired and lower wireless revenue.

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Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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