Broadcom Ltd (NASDAQ:AVGO) CEO Hock Tan is one of tech’s best dealmakers. Since taking the helm in March 2006, he has wasted little time in pulling off transformative deals. The result is that Broadcom is now one of the world’s largest chipmakers, with fiscal 2017 revenues coming to $17.6 billion.
Of course, Tan recently suffered a major setback. The Trump Administration blocked his mega $117 billion deal for Qualcomm, Inc. (NASDAQ:QCOM) because of national security concerns. Wall Street was relieved, as Broadcom stock actually increased on the news.
Yet it seems unlikely that Tan will somehow slowdown. For the most part, mergers and acquisitions is at the core of his growth strategy and has been a driver for Broadcom stock. Keep in mind that the average compound annual gains for the past five years have come to a sizzling 49%.
When it comes to dealmaking, the company has a lot of firepower. Cash flows are likely to continue at a robust rate and there is access to large amounts of capital. The market value of Broadcom stock is at about $101 billion.
So what might be the next deal to help drive Broadcom stock? Let’s take a look:
Deal No. 1 For Broadcom Stock: MU
Micron Technology, Inc. (NASDAQ:MU) has lost some momentum this week. One of the catalyst was a negative report from UBS Group AG (NYSE:UBS) analyst Timothy Arcuri, who noted that there are “cyclical” problems emerging.
No doubt this has always been the nagging issue with MU stock. It’s a big reason the company’s multiple remains fairly low despite the strong growth.
But I think the concerns are overblown. One reason is that the memory industry is essentially an oligopoly — and the operators have remained disciplined. Next, there are secular trends that should continue to drive growth at Micron. Some of them include smartphones, cloud computing, autonomous driving and IoT (Internet-of-Things).
All these are categories that could juice up Broadcom stock. What’s more, memory would be a nice complement to the existing portfolio of chips, which should allow for leveraging distribution channels.
Deal No.2 For Broadcom Stock: AMD
But AMD is actually likely to be amenable to a deal as well. The fact is that the company is hamstrung by its relatively small scale. So yes, Broadcom would be a good partner.
AMD would also offer some great technologies, which span several large markets. The company’s Epyc chipset is targeted at the datacenter, which has seen tremendous growth. Some of AMD’s customers include Microsoft Corporation (NASDAQ:MSFT), Baidu Inc (ADR)(NASDAQ:BIDU) and Tencent Holdings/ADR (OTCMKTS:TCEHY).
Then there are embedded chips, which allow for specific-purpose systems like smart watches, medical applications, IoT and smartphones. The market opportunity ranges from $14 to $15 billion a year, according to IDC.
But perhaps the biggest attraction for a buyer is AMD’s graphics processing units (GPU) technology. Because of the ability to process huge amounts of information cheaply, these types of chips have proven ideal for artificial intelligence (AI).
Deal No. 3 For Broadcom Stock: XLNX
Xilinx, Inc. (NASDAQ:XLNX) stock is far from cheap, with the price-to-earnings ratio of 35X. But the company also has some key advantages which deserve a premium.
XLNX is a leader in field-programmable gate array (FPGA) chips. This type of technology has become critical as systems get more complicated, such as for industrial, automotive and defense purposes. What’s more, FPGA chips have been quite effective for AI and machine learning.
Next, there should be synergy with Broadcom’s wireless and storage chipsets.
And finally, XLNX sports juicy gross margins, coming to about 71%. The main reasons include that the company is one of the few players in the market and the switching costs are generally high. Interestingly enough, its main competitor, Altera, was acquired by Intel Corporation (NASDAQ:INTC) a few years ago.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.