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Broadcom Stock Jumps on Morgan Stanley Upgrade

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Chip maker Broadcom (AVGO) stock jumped over 2% on November 19 after a Wall Street analyst upgraded it. Morgan Stanley raised its price target and recommendations on the stock, fueling its rise. The stock reached a new 52-week high of $325.67 on the day and settled at $317.70. At this closing price, Broadcom’s market cap was $126.02 billion. Year-to-date, it was up about 26.1%.

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Broadcom stock gets an upgrade

On the day, Morgan Stanley picked Broadcom as its new favorite stock in the chip space. As per CNBC, Morgan Stanley analyst Craig Hettenbach raised his rating on Broadcom to “overweight” from “equal weight.” Hettenbach also increased the stock’s 12-month price target to $367 from $298. This new target implies a 15.5% upside from its November 19 closing price.

The analyst told clients that Broadcom stock was a buying opportunity, according to the CNBC report. Should investors consider buying the stock at its current level? Let’s take a look at how the company is performing and examine Morgan Stanley’s analysis.

Morgan Stanley’s view on Broadcom

Morgan Stanley has told its clients that it foresees strong demand for Broadcom’s software offerings in the coming quarters. As cited in a report by TheStreet, Hettenbach has “increased confidence” in the company’s strategy of diversifying its business. He believes that Broadcom is “well positioned in the Data Era.” According to Morgan Stanley, Broadcom “can build on its leadership position in semis while leveraging its strong [free cash flow] to diversify into software.”

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The company’s recent acquisitions, including Symantec’s enterprise software business, have impressed Hettenbach. In August, Broadcom said it planned to acquire Symantec’s enterprise security business for $10.7 billion. It expects the enterprise acquisition deal to close by the end of January after getting regulatory approval. In early July, it had intended to buy the whole of Symantec for around $14.5 billion, but the deal fell apart. Last year, it purchased software company CA Technologies for $19 billion.

The acquisition of Symantec’s enterprise business should boost Broadcom’s revenue and generate cost synergies. However, it will also likely add to the company’s debt burden. Nevertheless, Hettenbach believes that the concerns related to the Symantec deal are overblown, per CNBC. He also believes that the company’s risk profile is “significantly more compelling than our broader semis coverage,” according to TheStreet. However, the analyst justifies the premium multiple as Broadcom’s having a profitable business and diverse business segments.

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Analysts’ recommendations

Overall, analysts are mostly positive on Broadcom. Of the 33 analysts tracking its stock, around 67% suggest “buys,” while 33% suggest “holds.” No analysts covering Broadcom stock suggest “sells.” Their mean price target of $323.30 implies a 1.8% upside from its November 19 closing price. Its median target price was $322.00 on November 19.

Broadcom’s returns

Broadcom stock closed 13.3%, 24.6%, and 25.2% above its 20-day, 50-day, and 100-day moving averages of $303.09, $291.02, and $287.48, respectively, on November 19. Its price is higher than its moving averages, so its trend is an upward one.

Broadcom’s 14-day relative strength index score of 67.22 indicates the stock is nearing the “overbought” zone. A stock is in “overbought” territory when its RSI level rises above 70. Broadcom’s upper, middle, and lower Bollinger Band levels are $327.46, $303.09, and $278.72, respectively. The stock closed near its upper Bollinger Band level yesterday, indicating that it was overbought.

Technical levels indicate that the stock is already in “overbought” territory at its current level. It could rise even further if the US-China trade deal happens.

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