Broadcom Ltd (AVGO) was formed in early February when chipmaker Avago bought Broadcom for $37 billion.
That’s certainly a massive merger, but to run with the big dogs — Intel Corporation (INTC) and Qualcomm, Inc. (QCOM) — you have to get off the porch.
And AVGO is doing just that. The merged company is now the No. 3 chipmaker in the world and holds Apple Inc. (AAPL) as one of its key clients. This is a blue chip tech play that makes a lot of sense in the current market.
The merger was a smart strategy because, as one, both companies are now a stronger, more diversified player in the tech sector. AVGO now has a hand in everything from set-top boxes to mobile telecom to cloud storage to data center networking.
AVGO Can Stand With the Big Dogs
This means AVGO will be able to compete with both INTC and QCOM on various fronts. Pre-merger, both companies were less diversified and the loss of a big contract to a competitor would have been a significant setback. Now, however, there’s more cushion and a synergized workforce to get a bigger slice of a bigger pie.
In early March, AVGO announced that it was planning to eliminate 1,900 jobs, even after management reported good earnings and raised guidance for 2016.
The layoffs were certainly baked in to the merger, since the whole point of a merger is to combine similar processes as well as add new strategic divisions. While the layoffs and their associated expenses will be written off until 2018, this has no effect on AVGO’s opportunities. The layoffs were strategic, not due to a decline in demand.
AVGO is a key supplier for AAPL’s iPhones and other wireless devices. This remains an important strategic partnership, but it’s by no means the only peg AVGO hangs its hat on.
AAPL will continue to try new chipsets from AVGO competitors, and AVGO will continue to grow its client list to include AAPL competitors, as well as those from other sectors.
Bottom Line for AVGO
The advantage AVGO has over QCOM and INTC is it doesn’t have the legacy challenges those companies have. The company has been built to compete in today’s market, rather than dragging an old model into a new age.
The data center space should offer some exciting growth in coming quarters as Big Data firms and their cloud-based storage networks continue to expand.
AVGO also recently noted that its top goals moving forward are to pay down debt and grow its dividend. That may not sound like a very exciting action plan, but those kinds of priorities speak to long-term growth and value.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
