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Trade War Risks Make Some Analysts Cautious on Broadcom

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Jun. 20 2019, Updated 3:19 p.m. ET

Analysts’ price target for Broadcom

The stock market is very volatile due to the US-China trade war, and semiconductor stocks have been showing sharp price movements. Wall Street analysts are optimistic on Broadcom (AVGO) despite weak full-year fiscal 2019 revenue guidance. Analysts have a median price target of $310 for Broadcom, reflecting an upside of 12% from the current trading price.

Analysts calculate the price target of a stock by applying a price ratio to their estimates for the company’s earnings and cash flows for the next few quarters. Analysts may use price-to-earnings, price-to-sales, or price-to-free-cash-flow multiples, depending on the company’s profile. They change their price targets frequently based on the most recent events in the company.

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These analysts have a “hold” recommendation on Broadcom

According to a CNBC article, analysts at Morgan Stanley lowered their price target on Broadcom to $250 from $262 as the company’s business is being negatively impacted by the accelerated trade war. These headwinds are compounded by inventory reductions by customers, which have resulted in a broad-based impact on the demand environment. Broadcom’s higher profit margins make it financially strong enough to withstand these headwinds.

Citi

However, analysts at Citi believe that Broadcom’s full-year fiscal 2019 revenue guidance of $22.5 billion and non-GAAP operating margin of 52.5% is “not that bad” given that the guidance factors in the Huawei ban and a possible tariff on an additional $300 billion worth of Chinese imports.

Goldman Sachs

Goldman Sachs believes that the current macroeconomic environment and weak outlook will keep Broadcom’s stock range-bound and forward valuations low. These low valuations mean a higher risk/reward ratio, as the stock will grow significantly when the trade war risk eases.

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