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  • Earnings
  • disruptive innovation
  • saas

Can Broadcom’s share price ride out the semiconductor shortage?

Amid the ongoing chip crunch, Broadcom’s [AVGO] share price is up 7.8% year to date through 1 June May. Its share price is currently 5.4% below its all-time high of $495.14, which it reached on 19 February. 

Semiconductor stocks have been one of the leading technology subsectors since the start of 2021. The ProShares Ultra Semiconductors ETF [USD] and the iShares PHLX Semiconductor ETF [SOXX], both of which have Broadcom in their top 10 holdings, have climbed 20.6% and14% respectively in the year to 1 June. The First Trust Nasdaq Technology Dividend Index Fund [TDIV], which also holds Broadcom as a top 10 asset, has climbed 14.3%.

Going into its second-quarter 2021 earnings call on 3 June, Broadcom’s share price climbed 3.5% in May, ahead of the S&P 500, which rose 0.54% in the same period. 

 

What investors can expect

So, what can we expect from the quarterly report? And how much of an impact will the semiconductor shortage have had on revenue and earnings?

In Q1 2021, Broadcom reported a record $6.6bn in revenue, up 14% year over year. Three-quarters of the revenue ($4.9bn) came from its semiconductor solutions segment, while its infrastructure software business brought in the rest ($1.7bn). The segments were up 17% and 5% respectively from Q1 2020. 

For the second quarter, the company indicated that revenue will be in the region of $6.5bn, which would be a 13% increase year over year. This is in line with the consensus estimate of $6.51bn for the quarter forecasted by Zacks Equity Research.

$6.6billion

Broadcom's Q1 revenue - a 14% YoY rise

  

No guidance has been issued on earnings per share, but the consensus among 12 analysts is $6.44, an increase of 25.3% year over year. 

With regard to semiconductors, the majority of the Q1 2021 revenue from the segment (40%) was from wireless customers and sales were up 52% from Q1 2020. In the second quarter, the segment is forecast to grow by around 17% again, with wireless expected to grow between 30% and 40%. 

On the Q1 2021 earnings call, Broadcom CEO Hock Tan said that whereas the semiconductor growth in the three months to the end of January was driven by an economic recovery in China, second-quarter growth will have been partly caused by a rebound in Japan and Europe. 

 

Balancing demand

Despite supply chain headwinds confronting the global semiconductor sector, Broadcom has been working hard to mitigate any impact, including extending lead times.

“This is not panic mode. This is a very structured and reasonable process… We have done a very good job of balancing demand and supply in our end markets,” Tan said during the company’s last earnings call.

Chip orders have been flooding in and, as of March, customers had ordered 90% of the company’s supply for the rest of the fiscal year.

“This is not panic mode. This is a very structured and reasonable process… We have done a very good job of balancing demand and supply in our end markets” - Broadcom CEO Hock Tan

 

Hans Mosesmann, analyst at Rosenblatt, praised Broadcom's handling of the situation, in particular its implementation of a non-cancellable looking policy. In a note to clients seen by Benzinga, he argued that management has good visibility, and a clear idea of what customers need.

Mosesmann reiterated a buy rating and raised his price target from $470 to $540, an upside of 15.3% from Broadcom’s share price at close on 1 June. Credit Suisse analyst John Pitzer is bullish on the stock as well and recently increased his price target to $580 from $480, a 23.8% increase. 

Pitzer sees particular strength in its $15bn contract to supply Apple [AAPL] with wireless components for current and future iPhone models until 2023, according to a note seen by Barron’s.

Broadcom is also poised to benefit from a ramp-up in 5G mobile connectivity that will lead to a surge in demand for higher-priced chips. Pitzer points out that around 10% of smartphones are currently 5G-enabled, and this number is set to increase by 150% annually over the next couple of years. Broadcom-produced parts will likely be in many of these handsets.

Research and development (R&D) rose almost 6% to $4.97bn in 2020 as Broadcom seeks to develop chips that offer customers faster speeds and lower latency. Continued investment in R&D should help it to maintain its competitive edge and secure big 5G contacts in the future, strengthening free cash flow generation further. 

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