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Why Did Broadcom Stock Fall despite Upbeat Earnings?

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Broadcom (AVGO) stock fell 3.78% on December 13. The company reported its fourth-quarter earnings results on December 12 after the market bell. The stock fell by about 2% in the extended trading on the same day. Notably, Broadcom’s earnings and revenues beat the fourth-quarter estimates. However, the company had a cautious stance on the semiconductor business. According to a Reuters report, investors weren’t pleased with the revenue guidance for 2020.

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Broadcom’s stock price performance

The stock closed the trading day at $315.42. At this price, Broadcom’s market capitalization was around $125 billion. The stock is trading 4.5% below its 52-week high of $330.16. Meanwhile, the stock is trading 36.9% down from the 52-week low of $230.33.

Overall, Broadcom hasn’t been a great performer this year. The stock has underperformed its semiconductor peers and broader markets this year. The stock has only returned 25.15% YTD (year-to-date). In comparison, Advanced Micro Devices (AMD) has returned around 122.91% as of December 13. Other semiconductor stocks including Micron (MU), Qualcomm (QCOM), Nvidia (NVDA), Intel (INTC), and Marvell (MRVL) have returned 61.36%, 57.54%, 68.15%, 25.52%, and 59.36% this year. The S&P 500 and the VanEck Vectors Semiconductor ETF (SMH) have risen about 26.41% and 60.24% YTD.

Broadcom’s outlook for 2020

Broadcom expects its 2020 revenues to be about $24.5 billion–$25.5 billion. The revenues exceeded analysts’ estimate of $23.79 billion for 2020 and were also 11% higher YoY from fiscal 2019. Broadcom gave an upbeat forecast due to better-than-expected 5G adoption.

However, investors still think that the 2020 revenues are weak. As a result, they’re anxious about the semiconductor business. The prolonged US-China trade war and the trading ban with Huawei had a negative impact on Broadcom’s core business. Notably, Broadcom couldn’t move ahead with its biggest-ever acquisition of Qualcomm in March amid trade war tensions. The trading ban also disrupted the company’s sales. Huawei accounted for about $900 million of Broadcom’s sales in 2018. Although the US and China reached phase one of the trade deal on December 13, there’s still uncertainty on some matters, according to CNBC.

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According to Kinngai Chan, an analyst with Summit Insights Group, the revenue outlook reflected a weaker-than-expected wireless business. According to Kinngai Chan, the semiconductor business could grow at about 4% year-over-year to about $18 billion in 2020. Meanwhile, Chan expects Apple 5G smartphone to likely ramp up the YoY growth in its wireless business in the second half of fiscal 2020. The company’s CEO Hock Tan also stated in the earnings call that the semiconductor business will return to YoY growth in the second half of the fiscal year.

Besides, the company expects an adjusted EBITDA guidance of $13.75 billion (plus or minus $250 million) in fiscal 2020.

Broadcom’s fourth-quarter earnings results

On December 12, Broadcom reported its fourth-quarter adjusted EPS of $5.39. The fourth-quarter earnings beat analysts’ estimates by 0.7%. The company has a trend of beating the earnings for over a decade. Notably, the earnings rose 4.5% YoY from the previous quarter. However, the earnings fell 7.9% YoY in the fourth quarter.

The lower earnings growth was due to a contraction in the gross margin and higher operating expenses in the fourth quarter. While the gross margin fell by 70 basis points in the fourth quarter to 54.6%, the operating margin fell from 30.3% to 18.2% during the same period. Broadcom’s operating costs rose 63.5% YoY. Meanwhile, the company spent $433 million in share repurchases during the fourth quarter, which helped the earnings growth. 

The total revenues rose around 6% YoY to $5.78 billion in the fourth quarter. Broadcom’s revenues improved from the previous quarter. The revenues also beat analysts’ average estimate of $5.73 billion. The software business led the company’s revenue growth.

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Broadcom is diversifying from a sluggish chip business and expanding into the software business. Last year, the company purchased CA Technologies and added significant revenues in fiscal 2019. The company also expects the recently acquired Symantec’s enterprise business to add to its revenues in fiscal 2020. Broadcom closed the $10.7 billion acquisition deal on November 4.

The company expects over $2 billion in revenues from Symantec’s enterprise business. Broadcom also plans to achieve cost synergies of about $1 billion next year after closing the Symantec’s deal, according to CRN. After the sale of Symantec’s enterprise unit, the company’s consumer cyber safety business was called “NortonLifeLock” (NLOK). Notably, NortonLifeLock became an acquisition target. Last week, software firm McAfee showed interest in buying rival NortonLifeLock.

Analysts’ recommendations on Broadcom stock after earnings

Overall, analysts favor a “buy” rating on Broadcom. Among the 34 analysts, 22 recommended a “buy” rating on the stock. As of December 13, only 12 analysts recommended a “hold.” None of the analysts recommended a “sell.”

Currently, analysts have a 12-month target price of $347.1 on Broadcom stock. On December 13, the stock was trading at a discount of 9.1% to analysts’ 12-month target price. The company’s median target price is $360.0 as of the same date.

After Broadcom’s earnings, Citigroup, J.P. Morgan, BMO Capital, and other analysts raised their target prices on Broadcom stock.

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