Investidea: Broadcom, because passive profitability with chips

Инвестидея: Broadcom, потому что пассивная доходность с чипов

BroadcomAVGO562.99 $BuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

Today we have a moderately speculative idea with a conservative touch: take shares of semiconductor manufacturer Broadcom (NASDAQ: AVGO), in order to make money on the expected growth of his business.

Growth potential and validity: 19,5% behind 2 years and 2 months excluding dividends; 9% per annum during 10 years including dividends. In all options, we take into account the possibility of spinning off the company's software division into a separate issuer.

Why stocks can go up: because the company pays good dividends.

How do we act: we take shares now by 563,00 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

The company develops, designs and sells chips - that is, semiconductors. Other companies are directly involved in the production for it..

According to company report, its revenue is divided into two segments.

Semiconductors — 74%. Devices, produced according to the project of the company. Segment operating margin — 53,84% from its proceeds.

Infrastructure software — 26%. Various cybersecurity software, optimization of work, automation. Segment operating margin — 69,84% from its proceeds.

Company sales by country and region are very difficult to establish, because often customers are local counterparties of companies from other countries. By the way,, most of the company's products are shipped to Malaysia, which acts as a transshipment point for the end customer. Therefore, it is more correct to evaluate not the geography of the company's supplies, and the further distribution of the consumption of its goods, good thing she has that information..

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Taking into account this methodology for calculating the locations of the company's customers, the distribution of its revenue by region looks like this: 19,25% — USA, 35,42% - China, 10,03% — Singapore and 35,3% - other, unnamed countries.

Инвестидея: Broadcom, потому что пассивная доходность с чипов

Инвестидея: Broadcom, потому что пассивная доходность с чипов

Arguments in favor of the company

« Kamon, guys, Chips!» The company's products were, is and will be in demand for a very long time simply because, that the world is becoming increasingly dependent on high-tech infrastructure.

Recent events in Eastern Europe have confirmed that, that the Western world continues to use the “ad smartphonem” argument, seeking to increase the technological gap between themselves and representatives of the periphery that do not fit into his picture of the world.

First of all because, that in terms of brute force, there is nothing special to oppose to them - and they ignore answers in the spirit of “you if you don’t like my geopolitics, so you come out with me once in a while, and not unlock from SWIFT ».

All in all, I think, that developed countries will step up the development of their technological infrastructure in the light of recent events even more actively and use chips like crazy. And the "advanced" economies of the developing world like the PRC will intensively imitate them.

And it will be good for Broadcom.

"Go to IT". The software segment of the company seems extremely promising to me - and it is very possible, that in the long term the company will spin off this division into a separate issuer. And the shares of this issuer will grow much faster than the "main" Broadcom. Confess, if there were no other reasons to invest in Broadcom, then I would still make an investment idea, based on this hope alone.

Dividends. The company pays 16,4 $ per share per year, what gives 2,93% per annum. That's quite a lot, considering all of the above, and can attract many large institutional investors into the company's shares, which is an important point: the company's capitalization exceeds the level of 228 billion dollars. Therefore, one cannot hope for a significant effect from the influx of retail investors into these shares..

What can get in the way

China. The Chinese factor may become a problem for us due to the large share of this country in the company's sales structure.

Firstly, Americans can strangle the high-tech industry in China in the cradle. AND, hence, may impose sanctions, from which the Broadcom business will suffer. By the way,, as you can see from the history of the Russian Federation, Americans take great pleasure in exploiting the technological vulnerabilities of their opponents, - and in the case of China, such a vulnerability is the dependence of Chinese enterprises on the supply of high-tech components by Western companies.

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Secondly, the current wide quarantine in China willy-nilly will reduce the company's orders not only from China, but also from neighboring Asian countries, which are built into the production chains of technological enterprises from China, like from Singapore.

Инвестидея: Broadcom, потому что пассивная доходность с чипов

Rates. Central banks of different countries, including FED USA, raise the stakes, which drives up the cost of loans.. This is bad for a company's stock for two reasons..

First reason: corporate borrowers will be forced to offer buyers of their IOUs a higher percentage, than now, and that would make Broadcom's dividend yield somewhat less attractive..

The second reason: this will make it more difficult for Broadcom to service its debts. And she has a lot of them.. The total amount of its debts is 50.23 billion, of which only 6.287 billion need to be repaid during the year. There is enough money at the disposal of the company to close debts: there are 10.219 billion in accounts and 2.539 billion in debts of counterparties. But still, the total amount of debts is too big., especially in view of that, what the company can invest in the development of its business.

One way or another, Broadcom's hefty debt will scare off investors and pose risks of pay cuts, which goes 93,5% its profits. And cuts in payouts could cause stocks to plummet..

Инвестидея: Broadcom, потому что пассивная доходность с чипов

Take control. The company does not own the production of its goods. On the one side, this allowed her to focus on many times more marginal activities such as design. On the other hand, production troubles of its counterparties can have an extremely negative impact on the company's financial statements.

Not cheap. The company is worth 8,43 annual revenue, and P / E she has 31,92. So don't call it cheap..

Not the norm. The current huge chip prices are more of an exception.: a number of factors such as the 2020 lockdowns, combined with a surge in demand and a previous history of underinvestment in manufacturing capacity expansion by semiconductor companies, has led to shortages and rising prices.

And although new chip factories will appear far from immediately, there are serious risks, that in a couple of years the semiconductor market will return to its usual state of oversupply and low prices for chips. However, this risk may not materialize., if the increasingly high-tech economy of Western and not so Western countries will steadily absorb chips in large quantities. However, this point should be taken into account..

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What's the bottom line?

We take shares now by 563,00 $. And then there are the following options:

  1. wait for quotes to return to the level 670 $. Think, we will reach it in the next 2 years and 2 months;
  2. keep shares next 10 years in sorrow and joy, getting, dare we hope, growing dividends.

In all cases, we take into account the possibility of spinning off the company's software division into a separate issuer. It may turn out like this, that shares of the main Broadcom will fall, and the shares of a separate software company will grow strongly. How it works, you can see in the comments to the idea on Synnex.

You should also look at the news section on the company's website, in order to have time to sell shares on the St. Petersburg Exchange before, how the market will react to the cancellation or reduction of payments.

But for now, SPb-Exchange starts work later than usual, which somewhat negates our time advantage. Hope, soon the situation will return to normal.

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