The Discount in Broadcom Stock Isn’t Quite Attractive Enough

While speculators could buy a solid AVGO on the cheap, broader market risks suggest patience

AVGO stock - The Discount in Broadcom Stock Isn’t Quite Attractive Enough

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A little over a year ago, Broadcom (NASDAQ:AVGO) made headlines for its aggressive pursuit of semiconductor giant Qualcomm (NASDAQ:QCOM). The news shook Wall Street and even unrelated passersby for its sheer scope. At $130 billion, the deal would have been the largest tech deal in history. As a result, AVGO stock fell under some pressure.

Potentially, the buyout would have bolstered Broadcom’s ambition in emerging opportunities, such as the 5G network. Additionally, AVGO has a proven track record of fiscal discipline. They’re experts at cutting fat and investing only in ventures that work. Nevertheless, a Qualcomm acquisition would have strained the organization.

But thanks to regulatory concerns that primarily revolved around national security, the takeover bid failed. President Trump squashed the deal in March of last year. Since then, Broadcom stock has meandered aimlessly, punctuated occasionally with spurts of both optimism and despair.

The concern now is that the company will move firmly towards the latter emotion. AVGO stock suffered a severe drop of nearly 9% on Thursday. Most of the bearishness can be attributed to Apple’s (NASDAQ:AAPL) horrific 10% loss, which took down the major indices.

According to CNBC, Apple shares suffered their biggest single-day loss in six years due to poor guidance. Specifically, less-than-expected iPhone sales in China could drop its fiscal-first quarter revenue by as much as $9 billion lower than prior forecasts.

For Broadcom stock, the issue is two-fold. First, the latest-generation iPhones integrate several AVGO components. A J.P. Morgan study revealed that every iPhone sold leads to $10 in revenue for the semiconductor firm.

Second, the ongoing U.S.-China trade war has a negative influence on almost every sector. From agriculture to automobiles, businesses are feeling the pinch. But could this also spark an opportunity in AVGO stock?

The Contrarian Case for Broadcom

For growth investors who don’t mind absorbing some risk, the current bear market has a silver lining; namely, so many attractive companies that enjoyed blistering performances in recent years have gone on discount.

We’re not talking about mundane price declines. For example, prior to the October 2018 meltdown, Apple was the world’s most valuable publicly-traded company. After its painful disclosure, AAPL fell to number four, behind internet giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). For Broadcom stock, it has dropped more than 13% over the trailing one-year period.

I completely understand the urge to speculate here. As I mentioned earlier, management has a history of making rational decisions. Especially at a time like this, you don’t want executives to chase pipe dreams.

More importantly, Broadcom runs consistently strong profitability margins. These metrics are among the best within the semiconductor industry, previously supporting the bull case for AVGO stock. Further, this dynamic confirms that the company features strong demand for its products. Once this bear market fades, Broadcom is well-positioned for future growth.

Even if the pessimism reigns longer than we like, the company enjoys a fairly stable balance sheet. Its also sitting on $4.3 billion in cash, and consistently generates positive free cash flow.

Plus, there’s no guarantee that the trade war will remain at a standstill. Our media focuses on the pain that the economic conflict has caused American workers and businesses, but we shouldn’t overlook that the Chinese are also hurting. After decades of phenomenal, paradigm-shattering GDP growth, they’re not used to prolonged — and some would argue unnecessary — pressure.

If the China headwind eases, it’s potentially game on for AVGO stock. A return to iPhone-backed revenues, plus opportunities in areas like 5G, bolsters the contrarian perspective. In the meantime, the company pays out a 4.6% dividend yield.

AVGO Stock Is Convincing, But the Markets Are Not

Broadcom stock is an interesting proposition; otherwise, I wouldn’t bother diving into its many positives. However, I have enough concerns to prevent me from jumping onboard.

If the only thing separating me from buying AVGO stock was the Apple disappointment, I’d already own a stake. But the broader market decline is much more than just one tech company. Even the trade war itself is a singular event.

I’m concerned about the interconnection among the various headwinds. Moreover, this overriding bearishness occurred when several companies were trading near their all-time highs.

For AVGO, its shares haven’t suffered the kind of volatility that affected its peers. Before taking a strong position, I’d wait for the markets to take some additional risk off the table.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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