Why Broadcom Ltd Stock Is a Solid Buy Now

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Broadcom stock - Why Broadcom Ltd Stock Is a Solid Buy Now

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Broadcom Ltd (NASDAQ:AVGO) is facing a crossroads. With the merger with Qualcomm, Inc. (NASDAQ:QCOM) blocked and a pending return to the U.S., AVGO is left wondering where to go next. Moreover, as the company plans its next product releases and acquisition targets, investors should decide if the failed merger presents them with a buying opportunity in Broadcom stock.

Broadcom had offered $117 billion for the company. In a recent article about Qualcomm, I described QCOM as falling into a lose-lose situation with the merger. Apparently, the Trump Administration decided the merger would become a loser for the country as well since it blocked the deal. Although the company is in the process of moving its headquarters back to the U.S., the government cited it as a “foreign” company as it is still based in Singapore.

As our own Lawrence Meyers points out, Qualcomm supplies products to the Pentagon. The Far East ties imply links to China, which raises a national security concern. Aside from unknown geopolitical issues, Qualcomm’s involvement in 5G could also play into the decision.

My colleague Dana Blankenhorn expands on this, pointing out CEO Hock Tan’s reputation for cutting research and shoring up monopoly positions. Many fear such a move would favor China-based Huawei Technologies Co., Ltd. In the 5G space. This could have forced the U.S. military, which prefers to work with American contractors, to buy Chinese equipment.

Rumors that Broadcom will attempt the merger again after the move to the U.S. is complete have also emerged. In many respects, the company has remained American. Broadcom was founded in California. It moved overseas when Avago Technologies, Ltd. (hence the “AVGO” stock symbol) took it over in 2016. Also, throughout the time in Singapore, the company maintained operations in California. Still, if the government suspects Broadcom would hand the 5G equipment market to Huawei, I doubt this would occur.

What Will Broadcom Do Now?

The question remains where the canceled deal leaves Broadcom and the tech sector in general. Broadcom confirmed that it still plans to move its headquarters back to the U.S. Singapore usually outranks the U.S. in “best countries for business” surveys. However, most regard the U.S., especially Silicon Valley, as the center of the tech world. Moreover, a U.S. base of operations makes mergers less exposed to the type of reviews that sunk the Qualcomm deal.

Given the willingness to spend $117 billion to buy Qualcomm, most believe Broadcom will pursue other mergers. Speculation surrounds companies such as Micron Technology, Inc. (NASDAQ:MU), Xilinx, Inc. (NASDAQ:XLNX), Analog Devices, Inc. (NASDAQ:ADI) and Maxim Integrated Products Inc. (NASDAQ:MXIM). Broadcom also acquired dozens of companies throughout its history before its purchase by Avago. Given past behavior, one should assume that these purchases should continue.

Should Investors Buy Broadcom Stock Now?

Consequently, investors should also decide if Broadcom stock is good for them. AVGO stock increased in value after completion of the takeover by Avago. However, since the middle of last year, the stock has seen little movement. In fact, the stock has fallen about 5% since Broadcom announced the proposed merger on Nov. 6. Perhaps investors felt uncomfortable about AVGO, which has a $106 billion market cap, paying $117 billion to buy another company.

Now, the pressure for Broadcom to acquire that level of funding remains off. Also, all the rumored targets come with much smaller price tags. And speaking of price tags, Broadcom stock trades at a reasonable valuation on a non-GAAP basis. The AVGO stock price today stands at about $260-per-share. With non-GAAP earnings of $16.02-per-share, the stock trades at only 16 times earnings. Analysts believe profit growth will stay in the high single-digits. Investors will have more information when AVGO reports quarterly earnings on March 15.

The Bottom Line on AVGO Stock

Looking at the prospective product lines, merger targets and earnings of Broadcom stock, investors must decide if the failed merger presents an opportunity. To be sure, not having Qualcomm leaves AVGO without the benefits of many chip-related products. However, the failed merger also leaves Broadcom’s balance sheet in a stronger position and leaves options open for other purchases in the future. With the low non-GAAP valuation, a failed merger by the company may mean the chance to buy AVGO stock with a stronger balance sheet and possibly a brighter future.

As of this writing, Will Healy is long MU stock.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/why-broadcom-ltd-stock-is-a-solid-buy-now/.

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