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The first half of 2023 turned into an incredible comeback story for the U.S. tech sector, thanks primarily to artificial intelligence (AI) gaining rapid mainstream adoption among the masses. This resulted in stocks of AI industry leaders like Nvidia (NVDA) (up 203% YTD), Google (GOOGL) (up 52.6% YTD), and Microsoft (MSFT) (up 32.8% YTD) all reaching new highs this year.
A critical aspect of the AI revolution is the role played by semiconductor companies. In fact, according to a report by the Semiconductor Industry Association, total sales from the semiconductor industry could reach $1 trillion by 2030, up from $574.1 billion in 2022 - representing a CAGR of 7.2%. With much headroom for expansion left in the AI market, the longer-term uptrend in these stocks, and many others in this space, is likely still in its early stages - despite the broader market pullback that has punished growth stocks in particular in recent months.
As investors increasingly look to balance out robust growth prospects with more reliable, steady sources of income, let's take a look at one top semiconductor stock that offers industry-beating returns, and offers a healthy dividend yield, as well.
About Broadcom
Headquartered in San Jose, Calif., Broadcom (AVGO) has been in the chips business for more than six decades now. The company is a semiconductor and enterprise software company that designs, develops, manufactures, and sells a broad range of semiconductor and infrastructure software solutions. Its semiconductor products include integrated circuits for networking, storage, wireless, and broadband applications while its software products include enterprise software products for IT infrastructure management, security, and data analytics. The company currently commands a market cap of $340 billion.
Shares of Broadcom are up about 50% on a YTD basis, outperforming top semiconductor funds like the iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH). Among its AI-focused chip industry peers, only Advanced Micro Devices (AMD) and NVDA have outperformed on the charts - but as we'll discuss below, these two can't compete with AVGO on yield.
So, after this searing rally, is Broadcom still an attractive investment choice now? I believe it is - and here's why.
1. Strong Fundamentals
Broadcom reported a solid set of numbers for its fiscal third quarter, as revenues rose 5% from the prior year to $8.8 billion, and EPS jumped 8.3% to $10.54 - surpassing the consensus estimate of $10.42. Impressively, the company's EPS has surpassed expectations in each of the past five quarters.
Both cash flow from operations and free cash flow rose in the neighborhood of 9% year over year, reflecting the company's robust operational capabilities as well as prudent cash flow management.
Although the company's sizeable debt of $38.2 billion may be cause for concern in this high-interest rate environment, AVGO's debt load is down from $39.1 billion at the start of the year. Moreover, the strategic move to replace its $32 billion bridge debt with three term facilities - $10.69B of debt maturing in two years, $10.69B in three years, and $7B in five years - is a smart debt management maneuver as the company looks to grow via acquisition.
2. Attractive Valuations and Above-Average Yield
Even after the stock's rally, Broadcom appears to be valued at reasonable levels. It is currently trading at a forward p/e of 19.56, which is below the sector median of 21.44. In terms of forward price/cash flow, AVGO's ratio of 18.62 is also below the sector median.
Notably, Broadcom's dividend yield of 2.23% is above the sector median (1.79%). Semiconductor stocks with comparable yields - such as Intel (INTC), Taiwan Semiconductor (TSM), and Qualcomm (QCOM) - have all lagged behind AVGO on the charts in 2023. Meanwhile, AMD offers no dividend, and NVDA is yielding 0.04%.
Further, in addition to its attractive dividend yield, Broadcom has consistently increased its dividend over the past seven years.
3. AI Upside
At its latest earnings conference call, the company said it expects the burgeoning generative AI space to result in annualized revenues of over $8 billion by FY2024.
Further, Broadcom remains a prominent supplier of AI-specific networking products to hyperscalers, driving demand for its switches, routers, and custom silicon AI engines. Consequently, Broadcom forecasts revenue of $800 million from its AI-deployed Ethernet switches in 2023, up from $200 million in 2022.
In fact, the company expects to generate 25% of its revenues from generative AI by the end of 2024, compared to 15% now.
4. Key Deals with VMware and Apple
The impending $61 billion acquisition of VMware is expected to draw a close soon, which should unlock additional value. After receiving regulatory clearance from the UK and EU, the deal is inching closer to approval in China, too. Now, clearance from U.S. regulators could be the last hurdle.
The VMware deal is projected to improve Broadcom's credentials in the cloud-computing and virtualization markets specifically, thanks to VMware's 45% market share in the latter.
Plus, Broadcom renewed a licensing deal with Apple (AAPL) earlier this year, wherein the Cupertino-based giant will not replace Broadcom components before 2027 - providing the company with revenue visibility from the iPhone maker. Notably, Apple contributes just under 20% of Broadcom's revenues, which is a sizeable chunk.
5. Upbeat Analyst Estimates & Ratings
Finally, analysts are expecting the company to continue to generate earnings growth, with 8.1% expected in FY 2024.
Overall, analysts have assigned the stock a “Strong Buy” rating and a mean target price of $953.44. This denotes an upside potential of about 15.8% from current levels. Out of 20 analysts covering AVGO, 15 have a “Strong Buy” rating and 5 have a “Hold” rating.
