Wall Street was left in a daze after Broadcom (NASDAQ:AVGO) recently announced its plan to acquire operating system producer CA Technologies. Why would a semiconductor company possibly be spending $19 billion on a software maker? The answer: no one really knows.
Goldman Sachs analyst Toshiya Hari fits right in with the herd, scratching his head at the intentions of the addition. Left with many questions surrounding Broadcom’s future, Hari downgraded his rating from Buy to Hold, dropping the stock’s target price $80 to $220. (To watch Hari’s track record, click here)
Following the notice of the acquisition plans, Hari was left wondering, “Where is AVGO’s strategic focus going forward?” The analyst remains unsure of whether this is Broadcom’s attempt to diversify its semiconductor business or shift its long-term focus to software production. From a semiconductor standpoint, since AVGO plans on acquiring a software company, what implications does this move have on its competitive position among industry leaders like Intel and Qualcomm? On the other hand, how efficient will the firm be in acquiring software assets relative to its new private equity competitors like Juniper and HP? Though Goldman calculated this purchase does have 3%-9% accretion potential, Hari maintains that the above questions must be answered as soon as possible if Broadcom wants to restore its image. The analyst concludes on the note that “management will need to provide greater clarity on its forward strategy and it will take time for management to gain investors’ confidence in their ability to achieve their goals.”
TipRanks suggests a more optimistic consensus of AVGO. Of the 29 analysts polled in the last three months, 22 are bullish and 7 are sidelined on the stock. With a 12-month average price target of $300.83, AVGO exhibits upside potential of 44.09% from current levels.