Broadcom Records Solid Quarter, Shares Attractive
Most major segments (aside from wireless) exhibited solid year-over-year growth, illustrating the company's breadth of offerings.
Broadcom (AVGO) reported in line fiscal third-quarter results while providing a fourth-quarter outlook slightly ahead of our prior expectations. The firm’s wireless segment was negatively impacted by share loss for certain RF parts, as customers were able to utilize lower capability parts in certain stock-keeping units. CEO Hock Tan was adamant that the cadence in adoption by leading OEMs of Broadcom’s premium RF parts should resume in material fashion next year, particularly as 5G capabilities begin to be adopted. In contrast, Broadcom’s other major segments exhibited solid year-over-year growth, illustrating the breadth of the company’s offerings. Tan also aggressively defended the recent CA Technology acquisition, citing the potential for Broadcom to sell its swathe of server products (networking, storage, connectivity) to CA’s predominantly enterprise customer base. We remain positive on the financial benefits of the deal (modest premium, high profitability, and solid cash generation), while the strategic ones mentioned by Tan could take some time to be fully appreciated. Nevertheless, we think the market negatively overreacted in the wake of the CA deal announcement and view shares as attractive relative to our unchanged $300 fair value estimate for narrow-moat Broadcom.
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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.