Let’s not be too cute ahead of the Q. With 5G heating up, we know which side of the line we want to be on.
Key points ahead of the quarter
AVGO reports F1Q2022 earnings today aftermarket. Consensus calls for $8.08 (+4% Q/Q, 23% Y/Y) on revenue of $7.6 billion (+3% Q/Q, +14% Y/Y). This compares to the year-ago quarter of $6.61 on revenue of $6.66 billion. For the full fiscal year, consensus calls for $33.16 on $30.7 billion (+12% Y/Y).
After taking a massive hit over the past several months, chip stocks have come back. Most of the optimism stems from the macro–interest rates may not rise as fast as expected.
AVGO has held up better than most
The pressure is on for a beat-and-raise. We like the odds, especially given AAPL’s better December. We expect AVGO to demonstrate acceleration in the networking business given the evident ramp in hyper-cloud deployments and data center CAPEX. AAPL’s strong December quarter is a good leading indicator for Broadcom’s 5G business. 5G is Broadcom’s biggest tailwind this year.
AVGO has done a good job diversifying the business in an effort to dominate infrastructure. Broadcom has gone on an acquisition spree in an effort to gain market dominance and diversify its business away from its core semiconductor segments. With its focus also shifting to datacenter growth, which accounts for more than 30% of total revenue, Broadcom has a strong portfolio of services, especially in 5G.
AVGO has some of the highest EBITDA margins in the semiconductor industry. AVGO generates ~53% EBITDA margin. Only Texas Instruments (TXN) is a few percentage points ahead (~55%). In comparison, Intel (INTC) is ~43%, Nvidia (NVDA) ~45%, Lam Research (LRCX) ~35%; Advanced Micro (AMD) ~25%. Strong earnings = dividend increases.
Massive buyback insulates from downside. AVGO announced a $10 billion buyback in December.
In these troubled times, we love a dividend growth story. Strong fundamentals aside, we love a dividend growth story. Broadcom pays an annual dividend of $14.90 (yield of 2.88%). AVGO has a 5-year dividend growth rate of almost 43%. Dividend comparisons: Bank of America (BAC), 26%; Mastercard (MA), 18%; Starbucks (SBUX), 16%. Total shareholder return for the past year was 22.2%.
AVGO at a Glance
Good news re: CalTech suit. Broadcom and Apple (AAPL) won a new trial after a federal appeals court judge tossed out a jury verdict that would have cost the companies $1.1 billion for allegedly infringing Wi-Fi patents held by CalTech.
Red flag: overboarding. Director Harry You is overboarded, serving as a director at Coupang (CPNG), Genius Sports (GENI), Rush Street Interactive (RSI), IONQ and GTY Technology (GTYH). Say-on-pay vote is a watch point, although it has improved since last year (95% for).
AVGO: Board Diversity Snapshot
We’re long into the print, but any pullback here is a gift. We remain buyers.
AVGO has held up better than most. Like most chipmakers (and just about everyone else), AVGO shares are down from their January highs. Shares are down 11% YTD—but AVGO has taken much less of a beating than the rest of the semi/tech group. Despite a painful 13% drop in January, AVGO shares are still up over 30% over the past 12 months. Within the chip sector, Broadcom stock has regained some key technical levels.
We’re liking the odds of another beat-and-raise. AVGO has developed a reputation for crushing earnings. AVGO has beat EPS estimates in each of the trailing four quarters. With that kind of track record, we certainly think there’s expectation built into the stock here into the print. At these levels, investors will need to see another beat-and-raise for the shares to move higher. We’re not magicians, but we do think the odds are good, supported by datacenter/cloud and 5G.
Risk/reward looks good here. We’re buyers on any pullback. Some folks will argue AVGO is expensive, but our bottom line is that this stock is one of the best ways to play 5G right now. AVGO trades at ~16x and ~15x F2023 and F2024E EPS, respectively. We’re long into the print and buyers on pullbacks.