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Buy Broadcom (AVGO) Stock Before Earnings Despite Semiconductor Market Downturn?

Benjamin Rains

Shares of Broadcom AVGO have fallen roughly 10% over the last month to sink below the broader semiconductor market’s 8.9% downturn. Despite the recent downturn, AVGO stock is up over 6% in the past 12 months to crush its industry’s 18% average decline.

So let’s see what’s going on with Broadcom at the moment and what to expect from its Q2 fiscal 2019 financial results that are due out Thursday, June 13 to see if now might be time to buy AVGO stock.

Quick Overview

Broadcom’s 2018 unsolicited attempt to acquire Qualcomm QCOM for $117 billion in cash and stock was shut down by President Trump on the basis that it could create national security concerns. After its Qualcomm attempt was shut down, the semiconductor maker that helps supply data centers and other industries bought enterprise software and solutions provider CA Technologies. The purchase seemed to pay off last quarter.

The company’s Q1 semiconductor solutions revenue fell 12% to $4.37 billion. Meanwhile, Broadcom’s infrastructure software sales skyrocketed 328% to reach $1.40 billion, driven mostly by its CA Technologies purchase. “Strong results in our networking business supported our semiconductor solutions segment, despite the anticipated sharp decline in wireless,” CEO Hock Tan said in prepared remarks.

“Additionally, our infrastructure software segment performed extremely well as we made good progress with the CA business integration into Broadcom… Similar to our peers, we see a slowdown in China impacting demand. However, much of this was factored into our original guidance and we are maintaining our full year fiscal 2019 business outlook.”

 

 

Outlook

As we mentioned at the top, shares of AVGO have slipped over the last month amid increased trade war worries. And of course, the semiconductor market is historically cyclical. Both of these factors have hurt the likes of Nvidia NVDA, Micron MU, Intel INTC, and others recently. Yet, we can see that Broadcom shares have crushed their industry over the last five years.  

Looking ahead, our current Zacks Consensus Estimate calls for the company’s fiscal second quarter revenue to jump 12.95% from the prior-year quarter to reach $5.66 billion. This would top last quarter’s 8.7% top-line expansion, which well just short or our estimates.

Peeking further down the road, Broadcom’s full-year fiscal 2019 revenue is expected to climb over 17% to reach $24.4 billion, driven, in part, by a positive impact from CA Technologies. With that said, the firm’s fiscal 2020 revenue is projected to jump 7.6% above our current year estimate to touch $26.25 billion in a sign of continued momentum.

At the bottom end of the income statement, AVGO’s adjusted Q2 earnings are projected to jump 5.9% to $5.17 per share. Last quarter, the company’s adjusted EPS popped 8.4% and topped estimates. Meanwhile, the company’s full-year earnings are projected to jump 11%, with 2020’s figure expected to come in over 14% above our 2019 estimate.

Other Fundamentals

Broadcom boasts a strong history of quarterly earnings beats. This includes a 4.3% average positive surprise over the trailing four periods. AVGO also pays an annualized dividend of $10.60 per share right now, for an impressive 3.89% yield.

Shares of AVGO are currently trading at 13.4X forward 12-month Zacks Consensus EPS estimates, which marks a slight premium compared to its industry’s 12.8X average. However, Broadcom stock has traded as high as 19.3X over the last five years, with a 15.2X median.

The company’s forward price/sales ratio of 4.2 also comes in above its industry’s 2.9 average. Yet, like with its forward earnings multiple, AVGO has traded as high 6X sales over the last five years. Therefore, we can say that AVGO stock is relatively inexpensive at the moment, especially considering its outsized returns compared to its industry.

 

 

Bottom Line

There seem to be reasons to consider buying Broadcom stock at the moment. And its shares closed regular trading Friday up 0.76% at $274.87 per share. This marked a 15% downturn compared to its 52-week intraday trading high of $323.20 to help potentially give the stock room to run if it is able to impress investors.

Broadcom is a Zacks Rank #3 (Hold) at the moment that has seen its earnings estimate revision activity remain pretty stagnant recently. On top of that, AVGO trades relatively heavily around earnings. Therefore, it might be worth thinking about buying AVGO stock heading into its quarterly report for those who can handle the inherent risks that come along with it.

Broadcom is scheduled to release its Q2 2019 financial results after the closing bell on Thursday, June 13. Make sure to come back to Zacks for a complete breakdown of its actual quarterly metrics then.

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