Why Broadcom (AVGO) Is a $300 Stock

Canaccord analyst Michael Walkley continues to view Broadcom (AVGO) shares favorably following the chip maker’s strong fiscal fourth-quarter earnings. Specifically, Broadcom reported fiscal Q4 non-GAAP EPS of $5.85 and non-GAAP revenue of $5.448 billion, beating consensus estimates of $5.58 and $5.4 billion, respectively.

Indeed, Walkley reports that Broadcom’s FY18 Q4 results were better than he had expected. The analyst believes “Broadcom’s Wired portfolio is well positioned to gain share in targeted end Markets” and expects “healthy ongoing growth trends to drive overall company growth”. Walkley further says “Broadcom is a leading global diversified semiconductor company with a broad portfolio of category-leading products and a leading customer base”, which will also contribute to future gains.

Given the significant change in Broadcom’s business model with the inclusion of CA, management has shifted to providing fiscal year guidance rather than quarterly guidance. To that end, fiscal 2019 revenue is expected to be approximately $24.5 billion, topping Street estimates of $22.58 billion. Walkley has increased his F2019 non-GAAP EPS estimates from $21.15 to $24.20, accordingly.

The analyst is not particular impressed with Broadcom’s Wireless segment, though he isn’t exactly worried, either. “Wireless trends will likely remain soft through F2019”, Walkley says, but primarily blames “uncertainty around iPhone sales” on the softening. Nevertheless, the analyst believes the “long-term outlook for Broadcom’s Wireless business is strong” as the company offers a “differentiated technology in the RF front end, Wi-Fi Bluetooth Combo Chips and other areas”.

On the margins side, Walkley is impressed with how Broadcom’s wired and enterprises businesses are contributing to strong profit. “The strong wired business trends along with strong trends in enterprise storage have helped drive strong gross margins and overall earnings and cash flow”, reports the analyst.

“With its strong cash returns of $12B with the buyback and dividend for F2019, industry leading margins, and compelling valuation,” Walkley reiterates a Buy rating on AVGO shares with a $300 price target, which implies about 32% upside from current level. (To watch Walkley’s track record, click here)

Most analysts agree with Walkley and remain positive on Broadcom’s future. TipRanks has compiled 20 analyst recommendations on the company; 17 recommend Buy, while only three recommending Hold. The average price target is in the ballpark of Walkley’s, at $291.42, representing a near-30% upside from today’s price.


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