Broadcom Ltd (NASDAQ:AVGO) is up 33% year-to-date, and there’s plenty of headroom left for AVGO stock to rise as this next iteration of technology expands.
Broadcom Ltd was formed last year when Avago Technologies bought Broadcom Corp for a whopping $37 billion. But this wasn’t the beginning of the mega mergers in the semiconductor chip space.
Intel Corporation’s (NASDAQ:INTC) $17 billion merger with Altera in 2015 started the ball rolling, then it circled back this year as INTC bought Redeye for another $15 billion. Both of those deals still don’t match the size of the Broadcom link-up, but the point is size matters in the chip business moving forward.
There are a number of reasons for this, but the keys to success in this low-margin business are being in the right sectors and having scale.
For example, Apple Inc. (NASDAQ:AAPL) uses AVGO chips in its iPhones. Now, Apple is looking to add wireless charging as a feature on its latest models. That means AAPL needs an extremely reliable supplier that can deliver in the neighborhood of 80 million wireless charging chips.
There are few chipmakers that can deliver on that kind of order. AVGO is now one of those. The company is also well-represented in the Galaxy S8, the flagship device of AAPL’s No. 1 competitor, Samsung Electronics (OTCMKTS:SSNLF).
Even before the merger with Avago, Broadcom was constantly buying smaller companies that could help it build out its capabilities. But, the big deals started happening when the chip sector was sluggish as buyers transitioned out of desktop computers and traditional networks and into the wireless space.
These mergers happened when companies were cheap and larger firms made bets on the next generation of chip clients.
Bottom Line for Broadcom and AVGO Stock
With the growth of virtual reality and augmented reality, as well as the Internet of Things and smart cars, today’s chips are ending up in all manner of products, allowing them to do things that few had ever even conceived before.
That means a greater demand for quality chips in large quantities.
That theory is playing out in reality, too. AVGO reports earnings on June 1 and analysts are expecting that year-over-year quarterly growth will be nearly 16%. That’s a pretty big number, considering the economy isn’t even firing on all cylinders, yet.
Add to that the recent $5.5 billion all-cash merger AVGO executed with Brocade Communications System Inc (NASDAQ:BRCD) to get a stronger hold on the networking storage business. AVGO is, by no means, resting on its laurels. There also has been talk that management is looking to buy Toshiba Corp (USA)’s (OTCMKTS:TOSYY) chip business as that giant tech firm liquidates assets to stay alive.
The drivers are there. Expect plenty more out of AVGO stock before the year is through.
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.
