On February 1, 2016, Singapore-based chipmaker Avago Technologies completed its acquisition of an American chipmaker. broadcom (AVGO -1.49%) And he inherited that name. The $37 billion merger was the largest semiconductor deal in history.
If you had invested $2,000 in “new” Broadcom on that fateful day, your investment would have grown to about $19,600 over the past eight years. If I had reinvested the dividends, my stake would have grown to about $25,000. Let's take a look at how Broadcom generated these multibagger profits, and whether it still has room to stay afloat for years to come.
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How did the “new” Broadcom impress the bulls?
Avago had already acquired a number of companies to expand its selection of wireless, optical, and data storage chips before adding the original Broadcom mobile, networking, wireless, and industrial chips to its portfolio. I did.
After that deal closed, Broadcom launched a hostile takeover. QualcommHowever, the Trump administration blocked the deal in 2018, citing national security concerns. This setback led Broadcom to move its headquarters to the United States later that year.
Broadcom later expanded into the infrastructure software market by acquiring CA Technologies in 2018, Symantec's enterprise security division in 2019, and cloud software giant VMware in 2023. Both of these acquisitions diversified the business from the cyclical semiconductor market and reduced its dependence on the semiconductor market. apple — It still accounted for 20% of revenue in the past two fiscal years.
From fiscal year 2016 to fiscal year 2023 (ending last October), Broadcom's adjusted revenue grew at a compound annual growth rate (CAGR) of 15%, with annualized adjusted gross margin from 60.5% to 74.7%. Adjusted earnings per share (EPS) grew at a CAGR of 21%. These strong growth rates indicate that the company's combination of organic and inorganic growth strategies are working, and bulls have flocked to the stock.
But investors shouldn't overlook Broadcom's two biggest weaknesses. First, his share count has increased by nearly 20% over the past eight years as he has issued more shares to fund acquisitions. Second, the debt-to-equity ratio rose from 1.3 at the end of fiscal 2016 to 1.5 in the first quarter of fiscal 2024 due to the boom in purchases.
What’s next for Broadcom?
In fiscal 2023, Broadcom generated 79% of its revenue from its semiconductor solutions and the remaining 21% from its infrastructure software business. However, the company expects its infrastructure software business to grow to about half of its total revenue from fiscal 2024 onwards, thanks to its acquisition of VMware, which was completed last November.
Broadcom is also likely to benefit from the growing AI market as companies upgrade their data centers and infrastructure chips. The company's AI chip revenue quadrupled year over year to $2.3 billion (31% of semiconductor revenue, 19% of total revenue) in the first quarter of fiscal 2024, offsetting weak enterprise and communications chip sales. . The company expects AI chips to account for 35% of its full-year semiconductor sales.
Apple also signed a new “multi-billion dollar deal” to buy Broadcom's 5G radio frequency components and other wireless connectivity components last May. So even if the iPhone maker's share of sales gradually declines as the company expands its software business, Broadcom won't be losing its biggest customer anytime soon.
Analysts expect Broadcom's integration of VMware to increase revenue and adjusted EPS by 41% and 11%, respectively, in fiscal 2024. The company expects its fiscal 2025 revenue and adjusted EPS to increase by 13% and 21%, respectively, by the time the acquisition closes. The company's stock is still trading at a reasonable 29 times forward P/E. Broadcom's future dividend yield of 1.6% may seem low, but it still has plenty of future dividend yield, as it only spent 44% of its free cash flow (FCF) on dividends in the past 12 months. It has also raised its dividend every year for the past 14 years.
Does Broadcom still have room to run?
Broadcom, already one of the world's largest chipmakers with a market capitalization of $630 billion, is well-positioned to benefit from long-term growth in the semiconductor, cloud, AI and cybersecurity markets. While it may not be able to immediately repeat the huge gains of the past eight years, there is still plenty of room for growth.
Leo Sun holds positions at Apple and Qualcomm. The Motley Fool has a position in Apple and Qualcomm and recommends Qualcomm. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
