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Will the Broadcom share price flatten out?

Will a continued software acquisition spree be good news for the Broadcom share price? 

The range in the Broadcom share price [AVGO] in 2021 has been rather varied. Starting the year at $431.08, the Broadcom share price hit an all-time high of $495.14 on 19 February and has been on a rollercoaster ride since.

The Broadcom share price fell to a 2021 low of $419.14 in May, but has since accelerated again, climbing as high as $494.02 on 12 July. 

Year-to-date, the Broadcom share price is up 11.1% through to the 21 July closing price of $479.02. The stock has gained 457.5% in the last 52 weeks.

457.5%

Broadcom's share price gains over the past 52 weeks

 

Although the Broadcom share price has been facing a major headwind in the form of the global semiconductor shortage, it’s been volatile over the last couple of weeks due to on-off rumours that the chipmaker was in talks to acquire SAS Institute for somewhere between $15bn and $20bn. The firm provides software for data analytics and data management. 

 

Positive sentiment

News of a rumoured takeover came on the 13 July and while the reaction from analysts was overwhelmingly positive, the Broadcom share price suffered a wobble, dropping 0.4% at that day’s close.

In a note to clients seen by Investor’s Business Daily, William Stein, an analyst with Truist Securities, wrote: "Since Broadcom's initially surprising pivot to software acquisitions in 2018, the company has consistently expressed its intent to build a software portfolio to expand its reach into IT budgets.

”Broadcom's strategy has been to pay a reasonable price for slow-growth software assets that cannot secure proper investor support in public markets.”

“Broadcom's strategy has been to pay a reasonable price for slow-growth software assets that cannot secure proper investor support in public markets” - William Stein, Truist Securities analyst

 

In July 2018, Broadcom acquired CA Technologies for $18.9bn. It quietly purchased cyber analytics software business Bay Dynamics at the end of 2019 — the price wasn’t made public. Around the same time, Broadcom completed a $10.7bn acquisition of enterprise security firm Symantec.

Stein’s target for the Broadcom share price is $554, an increase of 15.7% from its 21 July closing price.

Ambrish Srivastava, an analyst with BMO Capital Markets, was also bullish and noted that the implied valuation was within a similar range to its previous purchase, so Broadcom wouldn’t be overpaying. 

Srivastava added that SAS “fits into the profile of the kind of business Broadcom would be interested in,” according to a note to clients also seen by Investor’s Business Daily. His target for the Broadcom share price is $550, an upside of 14.8%. 

However, within a couple of days of the rumoured acquisition making the news, reports emerged that the founders of SAS Institute had backed out of talks. 

According to the Wall Street Journal, some SAS Institute employees didn’t believe the company — which has a "sprawling North Carolina campus with amenities including a yoga studio and a disc golf course” — was a good fit for the “efficiency-focused Broadcom”. 

Whatever the reasons for the deal collapsing, the talks ending abruptly has led to the Broadcom share price pulling back. The stock is down 1.4% from its 12 July high of $485.75 at the close of 21 July.

 

Software buys to lift Broadcom share price?

According to Stein, if the acquisition had gone ahead, then it would have boosted Broadcom’s free cash flow and earnings per share by 5% or so. 

Numerous reports also indicated SAS Institute’s revenue for the full year 2020 was $3bn. Assuming an average of $750m per quarter, this would have considerably boosted Broadcom’s most recent quarterly revenue.

In Q1 2021, its software segment brought in $1.75bn of the $6.66bn total revenue, up 4.8% from the sales of $1.67bn in the year-ago quarter. With SAS Institute’s assumed revenue added on, Q1 2021 sales would have been boosted by 42.9%. Plus, the segment would have then accounted for 37.5% of total revenue instead of a 26% share. Of course, the true impact could have been far greater. 

$1.75billion

Revenue brought in from Broadcom's software segment out of total $6 66bn in Q1

 

It wouldn’t be a surprise if Broadcom looks to expand its software segment with future vendor acquisitions. In the meantime, there are suggestions SAS Institute could become a target for the likes of Microsoft [MSFT]

Fund managers are generally bullish on Broadcom. For example, the ProShares Ultra Semiconductors ETF [USD] holds it in its top 10 with a weighting of 6.63%; the ETF has a year-to-date daily total return of 24.7%. 

Disclaimer Past performance is not a reliable indicator of future results.

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