The market for technology is going through a massive upheaval of disruption. In the past, investing in technology companies was all about the next gizmo that was set to change the market. And the successful companies in this space were those that kept rolling out the next gizmos that made the old ones obsolete and the new ones the must have ones.
Then rinse and repeat. And keep doing this quarter after quarter and you have a successful company in your portfolio. But as technology companies have been entering a number of various non-tech industries from taxis to cable television and of course the ubiquitous smart phones — it’s the turn of technology companies that are now in the sights of the disruptors.
The business of one-off unit sales of tech products is now obsolete. The next model is to seamlessly offer a stream of services that individuals and institutions can use to replace their constant streams of buying new stuff and replacing their old stuff.
This is particularly important when it comes to data processing, storage and communications. I remember in my old firms, that we would have floors upon floors of servers and data storage units both on and off-site complete with stand-alone refrigerator-cold HVAC systems to keep them from overheating and failing.
And I remember the backup systems that made my companies replicate these same systems in other locations to keep bank, fund and trading transactions intact regardless of the next act of God events that might occur. And for regulators from the FDIC to the Federal Reserve as well as the Office of the Comptroller of the Currency and other non-U.S. regulators, there were audits over our systems to ensure that we would keep everything under control.
This was a really costly way of running a bank or an investment management company.
But times are changing. Companies no longer have to have all of this equipment on hand. And they don’t have to have an army of IT guys to keep them working. And companies no longer have to budget over replacement of the equipment and the software every so many years. And companies don’t have to sweat as much over upgrades.
Instead, there is the nice comfortable fluffiness of the cloud to make so much of the past technology headaches just float away.
Cloud computing services provide individuals and institutions with the ability to outsource much of the equipment for the processing and storage of data. This includes everything from family photos to streaming movies or music. And it can also include airline reservations as well as bank and financial record keeping.
The market for cloud computing continues to ramp up. And in doing so, just in the U.S., the electricity consumption for the cloud amounts to nearly 2% of the overall electricity market alone … and that number is climbing.
This is providing opportunities for companies to capitalize on the switch from onsite computing to cloud computing. By providing the hardware and software to companies that provide cloud services, they can set up a stream of reoccurring revenues for their sales of the behind the scenes bits to make everything run. And for the companies providing cloud services, it sets up the reoccurring revenues of the subscriptions for accessing the cloud.
Now, we all follow the big cloud providers including Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and others. But many are ignoring the companies that have been working to become indispensable providers of the chips and bits to needed to power the cloud providers.
Broadcom (NASDAQ:AVGO) in San Jose is one of those key companies providing the chips and bits. Over the past several years, the company has been gathering up technologies and merging and acquiring companies with additional necessary technologies to make the cloud nice and fluffy and not stormy for customers.
It has its origins from the labs of Hewlett-Packard (NYSE:HPQ) from which it was separated back in 1999. Then, after various other mergers with the KKR-led Avago and the pending deal with CA Inc. (NASDAQ:CA), AVGO stock is emerging to become a behemoth for cloud market equipment.
Armed with its wired infrastructure products, its wireless communications systems as well as its storage and industrial products, Broadcom is a go-to shop for cloud and other mission-critical service providers.
This Is Why AVGO Stock Is So Appealing
Even before the completion of the CA Inc. merger, AVGO has seen revenues soar. The past three-year average is advancing by 60.46%, including both organic and acquired business units.
Operating margins for its products are ample, running currently at 23.95% for the most recent quarter. And the margins have been consistently soaring over the past eight quarters by some 184.04%.
Returns on assets are also impressive at 20.92%. And the return generated on the amount of equity held by shareholders is currently running at 42.6%. And it runs a good book of its debts with debt-to-assets running at a mere 32.20%. And this is on top of a large cash horde providing a current ratio of 5.87 and a quick ratio of 5.15.
All of this revenue and an arsenal of cash gives AVGO stock a dividend that’s running at $1.75-per-quarter, which has been rising over the past five years on average by 53.74%. The effective yield of 3.33% is quite attractive compared to the median yield of its peers that are running at only 1.95%.
AVGO stock has been lagging other technology stocks in the market largely due to regulatory hurdles over the halted merger with Qualcomm (NASDAQ:QCOM) and the pending deal with CA Inc. This is providing an opportunity to buy into this impressive cloud equipment company on the cheap. AVGO stock is only valued at a price-to-book ratio of 2.86, which is at a big discount to the median of its peers that are running at 4.08.
The bottom line for Broadcom? AVGO is an undervalued and potentially overachieving dividend company right in the middle of the transformation of the technology markets.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.
