BROADCOM S a n J o s e , C a l i f o r n i a

This Chipmaker Is A ‘Top Pick’ For 2019 Despite Turmoil

Investors are taking a wait-and-see approach to Broadcom as the company transitions from a chipmaker to a provider of diversified information-technology infrastructure.

But some analysts are already convinced that the company’s new strategy will pay off. At least three investment banks have named BroadcomAVGO stock as a “top pick” for 2019: JPMorgan, Mizuho Securities and Nomura Instinet.

A maker of wireless and broadband communications chips, Broadcom has moved into new markets — such as enterprise storage, networking and mainframe software — through acquisitions. Most recently, it purchased Brocade Communications in November 2017 for $5.5 billion and CA Technologies a year later for $18.9 billion.

“This is a company that IPOed in 2009 at a billion-dollar valuation and steadily grew that market cap to over $100 billion,” Nomura Instinet analyst Romit Shah told Investor’s Business Daily. “That’s a testament to the management team. Much of that market cap expansion came through M&A.”

Sideways Movement

Broadcom stock has been consolidating for the past 58 weeks. It hit an all-time high of 285.68 in November 2017 after it made a play for QualcommQCOM . But President Donald Trump blocked the acquisition of Qualcomm on national security grounds last March.

In April, Broadcom moved its headquarters to San Jose, Calif., from Singapore to avoid future U.S. government concerns about acquisitions of U.S. companies.

Broadcom stock has formed a saucer-with-handle base with a buy point of 261.69. It ended the regular session Wednesday at 253.51.

But Broadcom got socked along with other iPhone chip suppliers after AppleAAPL pre-announced weaker-than-expected Decemberquarter results after the market close Wednesday. Broadcom gets about 10% to 15% of its revenue from Apple, according to Mizuho Securities. Broadcom tumbled nearly 9% Thursday, though it tried to mount a comeback Friday.

Weak Market

Red flags for investors looking at Broadcom stock include weakness in the semiconductor sector as well as the broader market. Chip companies have fallen on worries about declining sales of smartphones, cars and industrial gear.

The company’s acquisition of CA baffled investors because it’s a software company. Broadcom usually targets chipmakers for mergers and acquisitions.

“People remain unconvinced about the deal,” Instinet’s Shah said. Broadcom stock will be a “tough sell” until the company can demonstrate the benefits of the CA acquisition, he said.

“They’re morphing into a conglomerate in technology,” Shah said.

Timing Looks Good

With the chip sector in a down cycle now, the timing of the CA acquisition looks pretty good, Shah said. A more diversified technology portfolio can help Broadcom weather chip-market downturns, he said.

Broadcom has “an almost impeccable track record for generating shareholder value,” but has stumbled over the last year and a half, Shah said. It failed in attempts to acquire Qualcomm and Toshiba’s memory chip business. Plus, it lost content share in the latest iPhones to QorvoQRVO .

Broadcom management has expressed confidence that the company can regain that content in the 2019 iPhones.

‘Multiple Growth Tailwinds’

JPMorgan analyst Harlan Sur called Broadcom stock a “top pick” for 2019 in a Dec. 21 report to clients. The firm added Broadcom to its analyst “focus list” because it sees “multiple growth tailwinds” for the company.

Broadcom should benefit from an upgrade cycle in cloud data-center networking equipment, Sur said. It also has solid prospects in making application-specific integrated circuits, or ASIC chips, for artificial intelligence. Plus, it should benefit from the rollout of 5G wireless networks, he said.

Mizuho analyst Vijay Rakesh likes Broadcom stock for many of the same reasons. He also called Broadcom stock it a “top pick” in a Dec. 14 note to clients.

“We believe that Broadcom is well-positioned in 2019-20 with the CA acquisition mostly behind, AI ASICs, regaining RF (radio frequency) share (in smartphones), 5G ramps with wireless/networking, and strong free cash flow and dividend growth,” he said.

On Dec. 6, Broadcom raised its dividend by 51% to $2.65 per share per quarter for fiscal year 2019, which started Nov. 5. That’s $10.60 a share in dividends on an annual basis.

JPMorgan’s Sur predicts Broadcom’s dividend will be at least $13 a share annually by the end of fiscal 2020.

Able To Diversify

Meanwhile, the CA acquisition provides some diversification away from the iPhone and recent China market turmoil, Rakesh said.

Since the acquisition, Broadcom has been shedding parts of CA that aren’t strategic. On Jan. 1, it announced the sale of CA’s Veracode Software, a provider of application security testing, to private equity firm Thoma Bravo for $950 million. CA purchased Veracode in March 2017 for $614 million.

Broadcom likes making big deals that move the needle for the company. But it probably won’t be in a buying mood again until at least late 2019, Instinet’s Shah said.

Broadcom has been on a streak of double-digit growth in sales and earnings per share on a year-overyear basis for 10 straight quarters.

Analysts predict that streak will end with the current quarter. Wall Street currently is modeling sales growth of 9.8% and earnings-pershare growth of 2.7%.

In the fiscal year ended Nov. 4, Broadcom earned an adjusted $20.82 a share, up 30% year over year, on sales of $20.8 billion, up 18%. For the current year, it guided to sales of $24.5 billion. That would be a year-over-year increase of 17.5%.