Broadcom Inc. (AVGO) is sending semiconductor bulls forward on Friday.
Shares of the San Jose-based chip leader achieved an all-time high opening price on Friday after the company's fiscal first-quarter earnings report forecast a strong second-half rebound in the semiconductor sector.
"We expect our Semiconductor business to bottom in the second fiscal quarter driven almost entirely by the seasonal drop in Wireless," CEO Hock Tan told analysts on Thursday evening. "But looking to [the second half of the year], we are confident the Semiconductor business will resume very meaningful growth."
On the back of the forecast rebound, Broadcom is guiding to net revenue of $24.5 billion, which is above an analysts' consensus figure that had been tempered by a tougher environment at the start of 2019.
The bullishness built into forecasts is echoed on Wall Street as the overwhelming majority of analysts have raised price targets for Broadcom.
"Overall, we were impressed with the company's execution across the board, as it was able to maintain its full-year guidance in a difficult environment," Piper Jaffray analyst Harsh Kumar said. "We tend to believe the full-year guidance is rather conservative, as there are multiple growth drivers and margin levers still in its arsenal as we progress through the second half of the year. We believe the company's diversified revenue model will continue to show its benefits."
Kumar set a $310 price target, expecting the stock to cruise past its all-time high in 2019 as demand for its diverse product range picks up.
He isn't alone in his optimism about Broadcom.
"We believe Broadcom is a leader in wireless, datacenter networking, AI/deep learning ASICs, storage, and now infrastructure silicon/hardware/software with broad-based exposure to positive trends in these end markets," J.P. Morgan analyst Harlan Sur said, highlighting the diversification thesis. "Broadcom remains a semiconductor powerhouse with unmatched scale and technology capabilities in the industry, securing its leadership positions in a diverse set of end markets."
Sur raised his year-end 2019 price target to $365 per share from the previous $325 on the back of his bullishness.
Free Cash Flow Machine
Broadcom has long been touted under CEO Hock Tan as a free cash flow generation juggernaut. The company generated $2.1 billion in cash from operations during the first quarter and its free cash flow margin was 35%.
The cash flow generation allows Broadcom to maintain a very strong dividend, at about a 4% yield, and to continue to buy back shares.
"We generated over $2 billion in free cash flow in the quarter, which represented 39% growth on a year-on-year basis," said Tom Krause, CFO of Broadcom. "Consistent with our capital return plan, we returned $4.6 billion to stockholders in the quarter, including $1.1 billion of cash dividends and $3.5 billion of share repurchases and eliminations. We remain focused on returning approximately $12 billion to stockholders in fiscal 2019 via a combination of cash dividends and stock buy backs and eliminations, while maintaining our investment grade credit rating."
The balance sheet at Broadcom remains strong, with the company carrying $5.1 billion in cash and cash equivalents into 2019.
The cash on hand has even brought large-scale acquisitions into consideration in the analyst community, a possibility provoked further by Nvidia Corp.'s (NVDA) $6.9 billion deal for Mellanox Technologies (MLNX) earlier this month.
"[We] have done quite a [lot] of acquisitions [of] very strong assets in the semiconductor space, and it's obviously something we continue to look at because obviously semiconductor is a core area for us," said Tan when asked if Broadcom is willing to mirror Nvidia's strategy.
He clarified that any acquisitions will take time and will be made "at a very measured pace."
In any event, the cash generation profile is a strong pro for bulls on the stock.
"Unmatched cash generation enables significant shareholder returns and should provide a nice catalyst for the stock," DA Davidson analyst Tom Diffely said. "We are reiterating our BUY rating and raising our price target from $300 to $325."
China Concerns Linger
While many investors may be weary of the fear created by unresolved trade talks with China over the past year, the risk remains.
About 48% of the company's revenue is generated from mainland China, making it imperative shareholders do not lose sight of the lingering risks.
"Many of our peers have commented that they are seeing a softening demand environment, especially out of China," Tan acknowledged. "While we're experiencing the same demand dynamics, we have factored in much of this macroeconomic backdrop when we provided 2019 guidance last quarter."
With that in mind, bulls are arguing that the risks are baked in, minimizing the downside.
"Looking forward, we do not expect AVGO to be totally immune from macro headwinds, but continue to believe the company's leadership positions in a number of markets, and product cycles therein to deliver relatively more stable results than many peers," Deutsche analyst Ross Seymore said.
Judging by the lofty heights the stock is reaching, the market appears to agree.
