Broadcom (AVGO) stock has been underperforming for quite some time. Like August, Broadcom stock continued to fall in September. The company’s shares fell 1.4% last month. Initially, the stock gained for seven days. However, the stock fell after Broadcom gave a cautious outlook amid trade war uncertainties. The convertible stock offering announcement also pulled down the stock. Recently, Shopify announced a secondary stock offering, which dented its stock price.
Broadcom stock continues to fall
Broadcom stock closed the trading day at $274.85 and fell 0.44% on October 1. The stock was trading 14.9% below its 52-week high of $323.20. Meanwhile, the stock was trading 31.9% above the 52-week low of $208.23. At Tuesday’s closing price, Broadcom had a market capitalization of $109.03 billion.
Broadcom has only gained 9.05% YTD (year-to-date). The stock has mainly lagged its peers and the broader market. Semiconductor stocks including Advanced Micro Devices (AMD), Marvell (MRVL), Qualcomm (QCOM), Micron (MU), NVIDIA (NVDA), and Intel (INTC) have returned 55.8%, 48.7%, 35.4%, 33.3%, 30.6%, and 10.3%, respectively, this year. The VanEck Vectors Semiconductor ETF (SMH) has risen 35.6% YTD. Meanwhile, the S&P 500 has gained 17.3% this year.
Broadcom reported mixed third-quarter results on September 12. While Broadcom’s third-quarter earnings beat analysts’ estimates, its revenues underperformed in the third quarter. The company’s revenues have been falling for two consecutive quarters. Broadcom expects its fiscal 2019 revenues to be $22.5 billion—8.1% higher than the same period last year. However, analysts expect the company’s sales growth to fall in the near term. Analysts expect the company’s fiscal 2020 sales growth to be 3.9% YoY.
The company faces a high debt burden. Recent acquisitions put more pressure on the company. Last year, Broadcom purchased software company CA Technologies for $19 billion. In August, Broadcom announced that it acquired Symantec’s (SYMC) enterprise unit for $10.7 billion. Earlier, Broadcom intended to purchase all of Symantec. The acquisitions increased the company’s debt burden.
Broadcom’s long-term debt was around $34.0 billion at the end of the third quarter—higher than $17.5 billion as of November 4, 2018. In March, Broadcom expected its long-term debt to increase to $37 billion in fiscal 2019.
Is more weakness ahead?
Broadcom thinks that the demand for microchips, which is already low, might not improve in the near term due to the trade war. Gartner expects the global semiconductor revenues to fall 9.6% YoY to $429 billion this year.
Notably, chip stocks fell pressure due to the US-China trade war. Semiconductor stocks like Qualcomm, Micron, and Broadcom mainly depend on China for revenue generation. Broadcom’s chips are used in electronic devices. Notably, Huawei accounted for about $900 million of Broadcom’s sales in 2018. We think that a trade deal between the US and China would help the stock.
Among the 31 analysts covering Broadcom stock, 21 recommend a “buy,” while ten recommend a “hold.” However, none of the analysts have a “sell” rating on the stock.
Currently, analysts have a 12-month target price of $320.68 on Broadcom stock. On October 1, the stock was trading at a discount of 14.3% to analysts’ 12-month target price. The median target price was $322.00 on the same date.
With a 14-day RSI (relative strength index) score of 41.04, the stock is neutral at the current level. An RSI reading above 70 shows that a stock is in “overbought” territory, while an RSI level below 30 shows that a stock is in “oversold” territory.
On October 1, Broadcom stock closed near its Bollinger Band lower range level of $271.12, which indicates that it has been oversold.
Broadcom stock’s valuation
The stock appears reasonable with a PE ratio of 12.92x for fiscal 2019 given the projected earnings growth. Analysts expect the adjusted EPS to rise 2.17% in fiscal 2019. The earnings will likely increase 8.69% in fiscal 2020.
Currently, we think that the chip market is in a transition phase. The chip market might take some time to recover. The stock struggles due to trade war concerns and the choppy chip demand environment. Meanwhile, the company is working to reduce its debt levels. Broadcom might stop its share buyback program. The company could also divert its cash flows to repay its debts. As a result, we’ll take a “wait-and-see” approach for the stock.