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Once a clear tech winner, Broadcom’s (NASDAQ:AVGO) stock has dropped 11% in just one month. Shares plunged following news that AVGO is acquiring CA Technologies for $18.9 billion. This was a curveball that the market was not expecting. And the Street reaction was skeptical to say the least.
Now TipRanks shows that the stock’s top-analyst consensus rating has shifted from Strong Buy to Moderate Buy. In the last month, six analysts have downgraded AVGO from Hold to Buy. These analysts come from Goldman Sachs; Raymond James; B.Riley FBR; BMO Capital; Charter Equity and Evercore ISI.
As a result, the stats on a three-month basis now look like this: 20 buy ratings vs 7 hold ratings. This is with a $294 average analyst price target. Bear in mind that before May 2018, AVGO had 100 percent Street support with only Buy ratings (on a three-month basis).
Nomura’s Romit Shah was the first to downgrade the stock. On May 9, Shah cut his rating while slashing his AVGO price target to $250 from $300. He made the move after the company’s wireless outlook came in worse than expected. According to Shah, Broadcom’s wireless revenue is likely to continue declining in fiscal 2019.
However, it was the CA Technologies announcement that spurred the recent wave of bearish sentiment. Goldman Sachs’ Toshiya Hari downgraded AVGO on July 18. Hari says CA’s low-growth software business does not correspond to Broadcom’s core competency- chips. As a result, the buyout has created worrying uncertainty regarding the company’s long-term strategy.
“Importantly, we believe management will need to provide greater clarity on its forward strategy and that it will take time for management to gain investors’ confidence in their ability to achieve their goals,” Hari wrote in his investor report.
He is now expecting AVGO’s earnings multiple to remain rangebound. Previously Hari had expected AVGO’s aggressive capital return plan to push its multiple from 11 to 15.
Meanwhile, BMO Capital’s Ambrish Srivastava downgraded AVGO from Buy to Hold on July 13. For Srivastava, the acquisition is “so far out of the company’s core competency and inconsistent with the company’s recent messaging, that it raises more questions than answers”.
Even with AVGO’s impressive track record of “acquiring underperforming semi assets, aggressively cutting costs, and integrating the acquisitions”, it is still “presumptuous” to think that it can effectively turnaround CA’s declining mainframe business.
He drastically reduced his price target to $230 from $345. This suggests marginal upside from the current $220 share price.