Broadcom (AVGO, Financial) has performed well as of late with the huge jump in global semiconductor demand and its strength in infrastructure software verticals.
The company is making the most out of the semiconductor shortage, and its acquisition of Symantec's enterprise security segment has also been a strong growth driver. The company's wireless and networking hardware business as well as its software business have been performing well.
Additionally, the upward momentum in 5G deployment and powerful adoption of Wi-Fi 6 in the access gateway bodes well for the company. Given the strong demand for chips, a growing infrastructure software business and significant cash flow that enables the company to pay out consistent dividends, I think the company is poised to deliver a strong 2021 for investors.
Recent financial results
Broadcom reported its third consecutive all-around earnings beat and finished the 2021 fiscal year on a high note. For its fourth quarter of fiscal 2021, the company reported revenue of $6.66 billion, which implies a 13.61% growth as compared to the $5.86 billion reported in the corresponding quarter of fiscal 2020. It cruised past the analyst consensus estimate of $6.62 billion and had a particularly strong gross margin of 72.74%. Broadcom's operating margin of 28.90% was also higher than that in the same quarter of the previous financial year.
The company reported net income of $1.38 billion and adjusted earnings per share (EPS) of $6.61, which surpassed the average Wall Street expectation of $6.56. It has reported a particularly strong cash position with $3.1 billion in the form of operating cash flows for the fourth quarter alone and a nominal $122 million spent in investing activities, resulting in robust free cash flows.
Supply chain strength
The semiconductor industry has gained traction owing to the rising demand for consumer electronic devices and mainstream adoption of industrial internet of things (IoT), 5G and artificial intelligence (AI).
The industry is also witnessing a demand explosion driven by a shift to the Cloud and the rollout of 5G networks, but it is placed at a near crisis point with regards to global materials supply shortages. Additionally, the customers who anticipated a supply crunch started making bookings for prompt deliveries, hence creating a demand-supply imbalance.
Broadcom continues to maintain its leading position in the semiconductor market and is uniquely positioned to handle the situation, since the company started reviewing its backlog from May 2020. The company has been extending lead times across its product portfolio as well as identifying real end-user demand and aligning the supply chain in order to match actual consumption.
It is worth highlighting that about 90% of Broadcom's 2021 supply has already been ordered by customers and the company has a no-cancellation policy that is expected to bode well for the top-line growth of the company in the coming quarters even as competitors suffer from a lack of preparedness.
The 5G revolution
As per a report by Grand View Research, the 5G infrastructure market is one of the fastest-growing markets in the world that is expected to grow at a compound annual growth rate (CAGR) of 59.6% from 2020 to 2027 to a size of $68.8 billion.
With a majority of Broadcom's business tied to wireless chips and accessories found in smartphones, the company is poised to get a boost in demand for its equipment. This is the first major upgrade to download speeds in a decade, thereby strong demand is expected from consumers and enterprises to upgrade their devices to be 5G capable, and Broadcom is deeply invested in providing chips that power the new devices.
Moreover, the company is the leader in FBAR RF (Film Buk Acoustic Resonator) for devices such as the Apple (AAPL, Financial) iPhone and Samsung (XKRX:005930, Financial) Galaxy, where a greater need for advanced filters in 5G can lead to healthy content gains.
Final thoughts
The above price chart shows that Broadcom's share has jumped up by more than 100% in the past 12 months, which can be attributed to strong revenue growth in both semiconductor solutions and infrastructure software.
Despite this meteoric price rise, the company is trading at a price-to-free-cash-flow multiple of 16.3, which is quite low as compared to the median multiple for the semiconductors space. The management's effort in managing the imbalance in demand-supply is noteworthy and should continue to drive investor optimism. Overall, I believe that the stock has a good potential to gain from the pent-up semiconductors demand and deserves an 'Outperform' rating.
Disclosures: No positions.
Read more here:
- CVS Health: A Rare Underpriced Health Care Blue-Chip
- Shopify: Flying High From the E-Commerce Boom
- Comcast's Peacock Is Spreading Its Tail Feathers
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
