Buy Broadcom Ltd (AVGO) Stock for Hock Tan’s Genius

CEO Hock Tan is turning the AVGO stock into a systems supplier

Since Avago Technologies bought Broadcom Ltd. (NASDAQ:AVGO) a year ago last February (taking Broadcom as its name, but retaining the AVGO ticker symbol), AVGO stock has been on a roll.

Investors who bought the name when it opened for trading have seen an 88% gain in the stock price, plus a dividend that has doubled to $1.02 per share.

The shares opened for trade May 31 at about $242 each, anticipating a June 1 earnings announcement that is expected to deliver $3.50 per share in profit, but could deliver $3.61 or more.

Under CEO Hock Tan, a reclusive native of Malaysia and proud MIT graduate who has endowed a chair at his alma mater, Broadcom has become a broad-line supplier of computer parts, combining the original company’s focus on mobile radio chips with the old LSI Logic’s storage chips and the former Emulex’ fiber networking products.

But how far can this go?

Not Done Yet

Tan has wasted no time using his company’s financial heft, and rising stock price, agreeing to buy Brocade Communication Systems, Inc. (NASDAQ:BRCD) for $5.9 billion, then putting the ethernet and switch businesses on the block to make Broadcom a systems supplier — selling service and support for whole boards rather than just chips.

The move has already paid some dividends, with Arris International plc (NASDAQ:ARRS) paying $800 million for Brocade’s Ruckus Wireless and ICX Switch businesses and Extreme Networks, Inc. (NASDAQ:EXTR) agreeing to buy the data switching business once the Brocade deal closes.

By selling systems, Tan can get premium prices for chips once thought to be lagging in their markets, like Emulex’ network boards. The parts of Brocade being retained give it a solid entry in the business for fiber-based storage area network products, combining big data center storage with the fastest-possible networking.

The combined company had just $3.53 billion in cash at the end of March, with $13.56 billion in long term debt on $49.62 billion in assets, but the rising stock price gives it currency, $96 billion worth at the opening of trading, a market capitalization that now exceeds that of Qualcomm, Inc. (NASDAQ:QCOM), Broadcom’s long-time rival.

Rave Reviews

Tan’s moves are drawing rave reviews from analysts, with 30 of the 35 now following the company having it on their buy lists, up from 26 just three months ago. He is said to combine the product knowledge of a tech guy with the wheeler-dealer mentality of a private equity guy, a rare combination in Silicon Valley.

Louis Navellier has written for us recently that the new Broadcom, under Tan, is “poised for long term dominance,” speculating that its next target may be Toshiba Corp (USA) (OTCMKTS:TOSYY), which is sinking following its entry into nuclear power through Westinghouse.

It is hard to argue with him. Technology has entered a new phase, with its dominance in the global economy giving it the sort of financial dominance once reserved for resource and manufacturing industries. This has brought a new type of leader to the fore, combining the deal-making savvy of Wall Street with an intimate knowledge of how chips become subsystems and systems become products meriting premium prices.

Tan has both. In a 2015 speech to Chinese engineers, one of the few he has given, he described precisely how his strategy would work at today’s Broadcom, laying out a strategy in which software becomes hardware, consolidation is slow, but analog is undervalued.

Tan does not consider himself a technologist, just a guy who knows how to make money the way other engineers know how to engineer paper cups. He lives modestly, his only affectation being a Tesla Inc (NASDAQ:TSLA) electric vehicle, and he speaks softly. But men like this will carry the big stick for the Valley going forward.

Yes, the Tan roll continues.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time,  available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/buy-broadcom-ltd-avgo-stock-for-hock-tans-genius/.

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