“Balance sheet remains robust ($6.4B cash) and dividend is safe (5.8% yield) . . . even under our “grey sky” scenario” commented the analyst. Right now, the company pays out a dividend of about $1.4 billion per quarter.
He also points out that management noted a recovery in China demand. CFO Krause sees domestic demand in China recovering toward normal trends, with strong hyperscaler and telco spend. On the supply side, China manufacturing has rebounded to 80%-plus capacity.
However, risks to consumer demand remain, with Schafer predicting “demand push outs coupled with likely demand destruction beginning in 2Q (June).” Schafer also sees a downward bias to handset units at Apple, Samsung, and with China OEMs.
On the plus, AVGO strength is led by robust hyperscaler DC/ Cloud spend. And longer term, the analyst believes structural growth drivers (e.g., RF content increase in smartphones, DC/Cloud spend, etc.) provide tailwinds.
Net-net the analyst concludes “We like AVGO’s impressive margin/FCF profile and group-high dividend yield. We reiterate Outperform and $350 target.” From current levels his $350 price target indicates significant upside potential of almost 50%.
In fact, AVGO shows a bullish Strong Buy analyst consensus according to TipRanks. Out of 19 analysts covering the stock, 17 rate AVGO a buy while only 2 analysts say hold. (See AVGO’s stock analysis on TipRanks)
Meanwhile, the $297 average analyst price target suggests 27% upside potential with shares down 26% year-to-date. “Coronvirus is weighing on AVGO and the group” says Schafer. AVGO “trades 9x our CY21E EPS, a deep discount to peers’ 16x… We are buyers here.”
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