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Broadcom (AVGO) Warns About Disruptions in Tech Supply Chain

Vidya Nair

Broadcom Inc. AVGO has reportedly asked customers to place orders six months ahead of time, which is significantly longer than the standard lead time of two to three months.

Per a Bloomberg report, Broadcom’s VP of sales, Nilesh Mistry, has stated in a letter to customers, that lockdowns in south-east Asian countries like Singapore, Thailand, Malaysia and the Philippines have impacted the company’s operations and are the likely cause behind the delay.

Another reason for the delay is the disruption of sea and air transport which has become more expensive due to the pandemic. Moreover, the company hopes to continue normal operations after the crisis has subsided.

Broadcom Inc. Price and Consensus

Broadcom Inc. Price and Consensus

Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote

 

Disruption of Supply Chains to Hurt Revenues

Lockdown measures to contain the spread of coronavirus in China and other Asian countries have caused massive delays in production as well as created logistic issues for Broadcom.

Broadcom is a notable supplier to major industry players like Apple AAPL, Cisco CSCO and Amazon AMZN, that are all dependent on the company for their chip requirements. Markedly, Apple (including sales to the contract manufacturer) contributed more than 20% of revenues in fiscal 2019.

As a result, disruptions in Broadcom’s supply chain could spread throughout the network and lead to missed product launches and other severe effects.

In order to mitigate the risks, the company will have to move its facilities to less affected countries and invest more resources in supply chain network mapping. This is anticipated to lead to significant increase in costs and hurt the company’s margins.

Moreover, lack of raw materials and other components is likely to the render the company unable to fulfill orders that in turn, is anticipated to cause a significant drop in revenues.

During first-quarter fiscal 2020 earnings call, Broadcom withdrew its previous guidance for fiscal 2020 and provided weak revenue guidance of $5.7 billion plus or minus $150 million for fiscal second quarter due to coronavirus related uncertainties prevailing in the market.

Anticipated Semiconductor Recovery Bodes Well

The outbreak of COVID-19 and closure of factories in China and south-east Asia is expected to cause massive delays to global supply chains. Notably, as per an IPC survey, conducted between Feb 11 and Feb 16, 65% of manufactures have stated that their suppliers have asked them to expect delays in shipments of up to three weeks on average. However, manufactures expect shipment delays to be at least five weeks.

While a complete halt of production as well as distribution is expected to put pressure on the semiconductor industry, it is expected to recover once the crisis eases out.

Growing adoption of IoTs, smartphones, storage solutions, networking and connectivity solutions as well as the need for high-speed data in both communications networks and data centers, favor prospects in the longer haul.

Notably, on Jan 23, 2020, Broadcom inked two separate multi-year agreements with iPhone maker, Apple. Per the 8K filed with the SEC, the deal is expected to generate $15 billion for Broadcom.

Moreover, 5G adoption beyond mobile is likely to boost demand for memory and storage, particularly in IoT devices, wireless infrastructure as well as data centers.

Thus, Broadcom is well poised to gain from higher demand for semiconductor-based devices once the coronavirus crisis has been resolved and the industry starts recovery.

Zacks Rank

Broadcom currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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