Shares in Broadcom Inc. (NASDAQ: AVGO) rallied as much as 12% on Friday after the company managed to beat consensus estimates for EPS growth. The company announced results for its fiscal first quarter which ended on Feb. 3.
Quarterly earnings per share grew 8.4% year-over-year to $5.55, ahead of Wall Street’s $5.22 estimate. Group revenues grew 8.7% to $5.78 billion, which was a little below the expected $5.82 billion.
Despite Single-Digit Growth There are Reasons to Cheer
On the face of it this growth may seem low for a chip maker, but there were several reasons for analysts to be pleased with the results. Firstly, free cashflow grew 39% to over $2 billion, and the company now plans to return $12 billion to shareholders via dividends and share buybacks.
Secondly, the company, and indeed the entire industry is emerging from a weak period where both smartphone sales and data centre expansion slowed.
In that sense, the fact that the company managed to deliver on its previous guidance and maintain its strong margins is positive.
Finally, the company also reiterated its guidance for the full 2019 fiscal year.
The company expects to earn revenue of $24.5 billion for the year and expects the semiconductor business to bottom in the second quarter.
Second Half Recovery Expected in All Business Segments
In fact, the company expects to see a recovery in its wireless, broadband and networking businesses later in the year. Broadcom’s CEO Hock Tan acknowledged that the slowdown in China was affecting business but said this was already factored into the company’s previous guidance.
For the last quarter the company managed to improve its gross margin by 1.5% to over 55%. However, like many other tech companies, operating expenses also increased markedly, in this case by 57%.
What Does the Future Have in Store for Broadcom?
Broadcom is an important supplier to both Apple and Samsung, as well as to cloud computing data centres around the world. While many of these businesses have experienced a slowdown recently, one would expect that to reverse in the next year or two.
If cloud computing continues to grow, data centres will need to expand capacity. And, if consumers didn’t buy smartphones in the last 12 months, presumably there’s more chance they will in the next 18 months. Therefore, there is every reason to expect Broadcom to see growing demand in the next year or two.
The question then is how much of that potential is priced in and is the stock still a buy at its new all-time high? AVGO is now up around 20% for the year, and 52% from last year’s July low. This price appreciation has occurred despite the fact that the company’s guidance always indicated growth rates would be below 10%. In other words, the market has already been looking beyond this quarter.
On the other hand, the stock price has broken above an important resistance level at $285 – and the forward PE of 12 is not demanding when you look at analyst estimates for the next year and 5 years.
A retest of the $285 level is highly likely, and this may give traders an opportunity to enter a long with a good risk-return profile. For investors who don’t already own the stock, that may also be the best price they can hope for, given the company itself will be in the market buying stock.