Key points
- Broadcom shares are in a healthy correction and preparing for another rally that could begin soon.
- Artificial intelligence and VMWare are driving growth, which is expected to accelerate throughout the year.
- Analysts are raising their price targets and could catalyze a rebound to new highs before mid-year.
- 5 stocks we like best from Broadcom
Price action in Broadcom Inc. NASDAQ: AVGO it started to correct after the first quarter earnings release and may fall, but this is a short-term phenomenon that investors should embrace. Broadcom’s market retreated not because of weakness or guidance, but because of market conditions in semiconductor stocks and bad news for its largest customer, Apple NASDAQ:AAPL. As for market conditions, Broadcom and other chip leaders have seen strong upside for many quarters and are ripe for a healthy correction. The market could drop to $1,155 to match the analyst consensus, but a sell-off is unlikely to reach such deep levels.
Broadcom sold a quarter, Acceleration Guides
Broadcom reported a solid quarter, with strength in both segments contributing to growth. The company’s revenue of $11.96 billion rose 34.1% year over year, beating the VMWare acquisition consensus by 200 basis points and a small 4% gain in the semiconductor segment. Infrastructure Solutions, which includes VMWare, is up 153% year over year. Gains in the semiconductor segment are noteworthy because they include growth despite weakness in some end markets.
More importantly, the VMWare acquisition is helping to sustain healthy margins and boost earnings. GAAP earnings increased 31% year over year, adjusted 6.4%, with an FCF margin near 40%.
FCF has surpassed $6.9 billion and is being put to good use, paying off debt incurred during the VMWare acquisition, buying back shares and paying dividends. The company’s cash balance declined year over year, but cash burn included the repurchase of 7.7 million shares and the payment of dividends. Cash flow and FCF are expected to improve throughout the year, so balance sheet improvements and capital returns should continue.
The guidance foresees an acceleration of activity in the following quarters. VMWare and AI are expected to drive the company to 40% growth over the fiscal year, with strength expected in the second half. Since the company is outperforming now and AI is gaining momentum, it will likely outperform.
Analysts raise targets for Broadcom on AI Outlook and VMWare
Analyst activity following the first quarter release favors a rise in stock prices, not a decline. Marketbeat.com tracks more than a dozen reiterated price targets and upward revisions, as the consensus advances and stocks trade at a new high. Bank of America issued the new high price target of $1,680, about 30% higher than the current stock, pointing to second-half strength driven by the VMWare acquisition and artificial intelligence. Other highlights from analyst chatter include a prediction that AI will drive business acceleration, normalization of legacy markets in the second half, free cash flow and dividends.
Apple has suffered recently and its stock prices have fallen. Bad news includes withdrawal from the electric vehicle race, a hefty fine from the EU and weak iPhone sales in China. Sales in China have slumped nearly 25% due to weak market conditions and competition and are not expected to recover soon.
Analysts believe Apple is lagging behind in artificial intelligence, but have not ruled out future success. They expect the company to weather the crisis as it has in the past, and some catalysts are on the horizon. Among them is the World Wide Developer Conference, where CEO Tim Cook is expected to reveal the company’s artificial intelligence plans, which will likely include Broadcom technology.
Technical Outlook: Broadcom peaks, correction underway
The technical action in Broadcom shows the market at its peak. The candle formed is the most consistent bearish candle formed in recent years, so consolidation may take some time. The first best target for support is near the 30-day moving average, which may not be strong enough. The next target is slightly lower, near $1,200, and represents a better target for stable support. If the market can sustain support at or near these levels, it could reach new highs before mid-year. Otherwise, new highs may not be seen until the second half. Critical resistance is near $1400. An upward move will open the door to another sustained rally.
Before you consider Broadcom, you’ll want to hear this.
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