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Why Broadcom May Be Well-Positioned to Handle Downturn

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Analysts’ views on Broadcom 

Broadcom’s (AVGO) stock fell 5.6% a day after it released its fiscal 2019 second-quarter earnings in which it cut its full-year fiscal 2019 revenue guidance by 7%, or $2 billion. The stock fell as the guidance diminished investors’ hope of a recovery in semiconductor earnings in the second half because of the negative impact of the US-China trade war and the Huawei ban.

However, Wall Street analysts have a different opinion. Of the 34 analysts monitoring Broadcom, 22 have a “buy” recommendation and 12 have a “hold” recommendation.

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These analysts have a “buy” recommendation for Broadcom

According to a CNBC article, analysts at Baird noted that Broadcom’s revenue guidance shows that the semiconductor industry is in a downturn, but its fundamentals show that it is well-positioned to handle a downturn. Broadcom has a fabless model, which means it does not have fixed factory overhead costs, a positive during a downturn. Moreover, its diversified product portfolio and stable revenue streams from software generate strong free cash flow and profits, ensuring dividend payments to investors. The above fundamentals will help Broadcom remain profitable even during the downturn.

Barclays

Barclays analyst Blayne Curtis stated that Broadcom’s revised revenue guidance was higher than expected but that was because the company did not reduce its full-year guidance last quarter when all other chip companies lowered their guidance. Moreover, the company had to factor in the recent developments in the trade war. The combination of the two factors led to a $2 billion cut in revenue guidance. This guidance could prove to be conservative if trade tensions are resolved and the Huawei ban is eased.

Until then, the fiscal 2019 guidance does not look bad given that Broadcom is still committed to spending $12 billion in shareholder returns.

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