How Can Europe Hurt Broadcom Stock?

Broadcom's strategy of tying hardware to software may be hurt by a European Commission interim order

When Europe promised to go after “big tech,” most investors thought that meant cloud giants like Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN). So they were stunned when the European Commission issued an interim order this week telling Broadcom (NASDAQ:AVGO) to stop exclusivity deals with six major TV and modem makers.

Broadcom AVGO
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It’s the first time in 18 years the European Union has filed an interim order. It began formally investigating Broadcom in June but has been looking at it informally for a year.

EU Competition Chief Margrethe Vestager said in a statement that there are broad indications Broadcom is engaging in anti-competitive practices. Broadcom chips go into set-top boxes and modems.

Shot Across the Bow

The move by Vestager, who recently got a second five-year term as the EU’s competition chief with an extra “digital age” portfolio, is seen as a shot across the bow against all U.S. tech companies.

Vestager said upon maintaining her position she would be making more use of interim orders if she saw serious and irreparable harm to competition, and obvious infringement at first sight. The Latin term is prima facie.”

Vestager said Broadcom’s conduct met those conditions. She said the company is abusing its position for system-on-a-chip products used in TV set-top boxes, fiber modems and xDSL modems. She specifically flagged six contracts, down from seven in the initial inquiry. That’s a way of saying the committee heard Broadcom carefully. The interim order lasts three years, but the EU’s executive branch could issue a permanent one during that time.

Broadcom will appeal to the European Courts and said contracts, except for any specifically mentioned in the order, remain in force. It claimed the order will “disrupt the efficiencies that Broadcom and European OEMs have achieved through strategic alignment.”

Broadcom Looked Cheap

Before this decision Broadcom had mainly been flying under the radar since failing to acquire Qualcomm (NASDAQ:QCOM) in March 2018. The White House had blocked the $117 billion deal on national security grounds. This came even after Broadcom moved its headquarters from Singapore to California and CEO Hock Tan appeared at the White House to celebrate the move.

Instead the company bought CA Technologies for $18.9 billion a few months later. That deal looked strange because CA was a mainframe software provider. But Broadcom said it saw an opportunity with it in the internet of things. This past August Broadcom struck again, saying it will buy Symantec’s (NASDAQ:SYMC) enterprise security assets for $10.7 billion. The deal should close by the end of 2019.

The result is that right now Broadcom looks cheap, as Silicon Valley stocks go. While the price-to-earnings ratio is a fat 41, the $2.65 per share dividend yields an equally fat 3.7%. In its current fiscal year, which ends in November, Broadcom has already covered that dividend nearly twice over.

Investors are paying a little over five times revenue even before Symantec’s contribution is added to the pile. There’s $34 billion of debt on the books and just $5.4 billion in cash.

The Bottom Line on Broadcom Stock

Some analysts have recently begun nibbling on Broadcom stock, saying the inventory recession that had plagued the industry seems to have bottomed out.

Broadcom chip revenue is up just 6% so far this year. It recently reiterated its full-year revenue estimate of $22.5 billion, with $5 billion coming from CA software. Getting into software has pushed gross margins higher, Tan said recently, and the company’s cross-selling of hardware and software is working.

Tan specifically cited cross-selling between his Brocade modem business and CA software in his third-quarter conference call. It’s that cross-selling, however, that seems to be the target of the European action. If you’re buying Broadcom now, you’re betting Tan can find a way around the regulators. That’s usually a good bet.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/european-union-broadcom-stock-regulations/.

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