Company profile
Before we start to talk about Broadcom share price, if you are not familiar with Broadcom, I strongly recommend that investors read my other previous post of “Significant changes in Broadcom’s business approach” before continuing to read this article.
Capital operation
Broadcom should be a model for capital operations among U.S. listed technology companies. The main man behind this is Broadcom CEO Hock E. Tan.
Note: What is capital operation?
In Sections 6-7 of my book “The Rules of 10 Baggers“, “Five Capital Operations Have a Strong Impact on Stock Prices”, the entire section is dedicated to introducing the capital operations of enterprises.
The content will not be repeated here. Interested investors can refer to the contents of my book. And I also specifically emphasize that capital operations are very important for all listed companies.
Stock split
Excluding Broadcom’s three stock splits before it was acquired by Avago. In June 2024, Broadcom announced that it would conduct its first stock split since its listing on July 13, 2024, splitting one stock into ten shares, causing Broadcom’s stock price to surge by 12.27% the next day.
Repurchase
In fiscal 2022, the company conducted a $7 billion stock repurchase program. In fiscal 2023, the company spent $3.42 billion on stock repurchases.
Cash dividend
The yield rate is 1.17%. For a long time, Broadcom has been a stock with relatively high cash dividends among high-tech stocks. In fiscal year 2022, the company paid out $7.032 billion in cash dividends.
Acquisitions
Under the leadership of Broadcom CEO Hock E. Tan, the company continues to carry out large-scale mergers and acquisitions, and the target companies have the following characteristics:
They are all well-known leading companies in the industry.
Not limited to semiconductor companies, it has also acquired numerous large software companies.
Although unsuccessful, Broadcom also wanted to acquire Qualcomm and SAS, two companies with high visibility and market leadership in semiconductors and enterprise data analysis software respectively.
For information on which important companies Broadcom has acquired, please see my previous post of “Significant changes in Broadcom’s business approach“
The field Broadcom has #1 market share
Customized chip (aka ASIC)
Potential market size
In the ASIC customized chip market, Broadcom ranks first with a market share of 35%. SemiAnalysis said that Broadcom’s ASIC business scale can reach 10 billion US dollars.
Broadcom’s management mentioned in the first half of 2024:
- In the next 5 years, artificial intelligence semiconductor opportunities will be a market opportunity of US$150 billion
- This means that annual revenue growth for artificial intelligence will be between 30-40% during this period
J.P. Morgan said: “We believe that Broadcom’s ASIC customized chip team is still expected to drive AI (ASIC + network) revenue to more than approximately US$12 billion in 2024, and will reach more than US$16 billion in 2025. “
Customers
Broadcom’s diversity in software and hardware business, coupled with a combination of reliable product lines, will help expand its customer base. Large customers disclosed by the outside world as of 2024 include Alphabet, META, Apple, ByteDance (the parent company of TikTok) and OpenAI; and there is another large customer that is about to finalize the contract.
In addition, Broadcom also has some strong partner customer bases such as Microsoft, AT&T, etc.
For the dedicated discussion on ASIC, please see my post of “ASIC market is getting bigger, and related listed companies in the US and Taiwan“
High speed transmission
Broadcom has a lot of PCI Express, which is the technology for high-speed transmission and exchange of computer data, and has long been a leading manufacturer in this field.
Ethernet switching
Before Broadcom was acquired by Avago, it owned many key technologies for Ethernet wired network switching. In fact, Broadcom has been a leading manufacturer in the field of Ethernet wired network switching for decades.
Radio frequency
Anwar, the predecessor of Broadcom, was well-known in the technology world for its radio frequency technology. Radio frequency is a key technical component of mobile phones, and almost all major mobile phone manufacturers in the world are Broadcom’s customers, including Apple.
Hidden competitiveness
CEO
Broadcom CEO Hock E. Tan is one of the most critical reasons behind the company’s success. Hock E. Tan is a Malaysian-born Chinese. He holds a PhD in mechanical engineering from MIT and a master’s degree in business administration from Harvard University. Therefore, in addition to having a background in science and engineering, Chen Fuyang is also familiar with financial management and business operations.
In the past few years, Hock E. Tan has topped the salary rankings of CEOs of listed companies in the United States, and has often been ranked among the best CEOs of many listed companies in the United States. Both illustrate his outstanding leadership abilities.
Excellent CEOs of listed companies are hard to come by, especially those with outstanding financial and technological backgrounds who can consistently deliver impressive results.
The reason behind the long-term continued outperformance of Broadcom’s stock price is that I vote for Broadcom CEO Hock E. Tan.
Infrustructure software
From scratch, Broadcom’s software division’s revenue alone can now rank seventh in the world, second only to Alphabet, Microsoft, Meta, Oracle, Seifushi, and SAP; and even surpasses Adobe. Well-known large software company.
Broadcom is the “only” listed semiconductor company that has many large-scale software product lines. These softwares are all very well-known large-scale software, considered strong products in their respective fields, and have long-term reliable large-scale enterprise customers. Customer information basic software was mainly acquired through mergers and acquisitions in recent years.
In the second quarter of fiscal year 2024, Broadcom’s software department’s total revenue accounted for 42.35% of the entire company’s total revenue, which shows the importance of Broadcom’s software department.
The representative of sustainability
In my book “The 10x Stock Rule,” I tirelessly state over and over again that “sustainability” is very important to stock investing. Broadcom can be said to be the best representative of sustainability, which is one of the few large listed companies that can perform well in the long term.
Regarding the topic of “sustainability”, readers can also refer to the analysis of my other post “Sustainability is important in stock market investment”
Artificial intelligence
AI revenue grew 280% Y/Y in Q1 2024
In the second quarter of fiscal 2024, sales of Broadcom’s artificial intelligence-related divisions increased by 280% annually, and the company currently expects sales of Broadcom’s artificial intelligence-related divisions to exceed $11 billion in fiscal 2024. Please note that this is just Broadcom’s artificial intelligence-related department, not the entire company’s revenue.
What technologies are used in artificial intelligence?
high speed transmission
In the second quarter of fiscal 2024, Broadcom doubled shipments of PCI Express switches and NICs in its AI backend fabric.
Ethernet switching
In the second quarter of fiscal 2024, Broadcom doubled shipments of PCI Express switches and Ethernet switch NICs in its AI backend fabric.
Customized chip(ASIC)
Broadcom has already captured 15% of the market share in the AI chip (mainly designing customized chips for several very large customers) market in 2023, and is expected to reach 25% of the market share in 2024, with total revenue exceeding US$10 billion. .
Alphabet is one of the major customers of Broadcom’s customized silicon (ASIC). These chips are designed to support artificial intelligence and machine learning and make these tasks more efficient. Meta Platforms, AT&T, Microsoft have also emerged as a significant customer, as it is using Broadcom’s ASICs to develop the Metaverse’s hardware.
For the dedicated discussion on ASIC, please see my post of “ASIC market is getting bigger, and related listed companies in the US and Taiwan“
Capital market performance
The seventh largest by market capitalization
As of June 18, 2024, Broadcom’s market value was US$839.05 billion, making it the seventh-largest company in the U.S. stock market.
share price performance
As of June 18, 2024, it has increased by 557.88% in the past five years and 107.66% in the past year. Among the top ten companies in the world by market capitalization, except for Nvidia, his performance should be considered the best.
Valuation
Broadcom’s price-to-earnings ratio of free cash flow in the past 12 months seems reasonable, about 44 times; the price-to-earnings ratio is about 71, and its market value is about $772 billion.
Cash dividend
As of 2023, Broadcom has increased cash dividends for 12 consecutive years. In the ten years from 2013 to 2022, the 10-year compound annual growth rate of cash dividends is 142%, and the yield rate of cash dividends is 46%.
Repurchase
Broadcom is one of the very large public companies that continues to aggressively repurchase stock. For example, in December 2021, Broadcom announced a $10 billion stock repurchase authorization. In May 2022, a new $10 billion repurchase program was authorized.
Outlook
Broadcom expects fiscal 2024 revenue of $50 billion (up from previous guidance of $50 million) and adjusted EBITDA margin of 61% (up from 60% previously). The growth reflects Broadcom’s growing dominance in the artificial intelligence infrastructure market.
Broadcom expects revenue of $51.24 billion in 2024, with a price-to-sales ratio (P/S) of about 16, according to Wall Street estimates. Wall Street expects revenue growth of 43% in 2024 and 16% in 2025.
Investment Risks
Apple accounted for a fifth of revenue
Over the long term, it expects to generate about half of its revenue from software, thus reducing its dependence on the cyclical semiconductor sector and its top customer, Apple, which accounted for a fifth of its sales over the past two fiscal years. For any company, it’s a big risk to rely on a specific customer.
Debt ratio is too high
Broadcom’s current debt ratio is 1.5, Nvidia’s is only 0.5, and its total debt is US$74 billion; but Broadcom’s management stated that it plans to continue to repay debt at a rate of approximately US$2 billion per quarter.
This was mainly caused by Broadcom’s high borrowings in the past in order to acquire large software companies. In particular, the software companies acquired by Broadcom were all very large companies (VMware, Symantec, and CA were all large software listed companies), the cost is affordable.
Acquisitions impact profit margins
Broadcom’s free cash flow profit margin in 2023 will be 49%, while it will drop sharply to 36% in the first quarter of 2024!
Broadcom currently has an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 61%. Due to mergers and acquisitions in 2025, integration costs are basically completed, and VMware will be able to help Broadcom’s free cash flow profit margin be close to 50% as in 2023.
Conclusion
“99% of all internet traffic crosses through some type of Broadcom technology”, Broadcom said.
In short, Broadcom has the following rare characteristics of large listed companies:
- It has diversified and market-leading software and hardware products and revenue growth drivers.
- An excellent management team that can continue to deliver outstanding results.
- A unique capital operation that has proven successful.
- A cash dividend yield policy that has been higher than the market for many years, as well as a tracking record of dividend growth rate.
For a super-listed company like Broadcom, which has the seventh largest market capitalization, having these advantages at the same time is a very difficult achievement to achieve, which proves that the premium that investors give to Broadcom’s stock price is reasonable.
I am the author of the original text, the essence of this story was originally featured on Smart Magazine, Issue of November 2024
Related articles
- “The reasons behind Broadcom share price consistantly outperformance“
- “ASIC market is getting bigger, and related listed companies in the US and Taiwan“
- “Comparison of AI chips GPU and ASIC”
- “Significant changes in Broadcom’s business approach“
- “Sustainability matters in stock market investing“
- “TSMC negative corp culture and management style are detrimental to its future and growth“
- “Four chip companies account for one-third of S&P 500 gains so far this year
- “Top five lucrative artificial lucrative intelligence listed companies“
- “Why is TSMC valuation much lower than US peers?“
- “What’s TSMC DCF intrinsic value?How to calculate it quickly with a free tool?“
- “How many fabs and houses does TSMC have currently and in the future?“
- “Yield rate comparison of SMIC, Rapidus, TSMC, Samsung, Intel’s advanced process“
- “The TSMC cost, sell price, and R&D cost of chip foundry“
- “ASML, who dominate TSMC’s fate“
- “Comparison of SMIC, Rapidus, TSMC, Intel, and Samsung’s new process roadmaps for future chips“
- “Two long-term threats to TSMC: US and SMIC“
- “Why is TSMC’s profit margin much greater than competitors?“
- “How does TSMC make money?“
- “Zyvex and sub-nanometer semiconductor processes, will Zyvex threat TSMC?“
- “TSMC gets emerging and serious challenges“
- “How does nVidia make money, Nvidia is changing the gaming rules“
- “The reasons for Nvidia’s monopoly and the challenges it faces“
- “Why nVidia failed to acquire ARM?“
- “Revisiting Nvidia: The Absolute Leader in Artificial Intelligence, Data Center, and Graphics“
- “How does Intel make money? and the benefits to invest in it“
- “Intel’s current difficult dilemma“
- “How does Micron make money? What investors should know?“
- “How does Texas Instruments make money? Amazing long term capital reward and company net profit margin!“
- “How AMD makes money? A rare case of turning defeat into victory“
- “Why is AMD’s performance so jaw-dropping?“
- “Qualcomm diversifies success, no nonger highly dependend on phone“
- “How does the ubiquitous Arm make money?“
- “Data center, a rapidly growing semiconductor field“
- “How does Applied Materials, lord of semiconductor equipment, make money?“
- “How does Lam Research, top chip equipment player, make money?“
- “The lucrative semiconductor supply chain“
- “Global semiconductor chip market in detail, big dominators and markets“
- “6 common wrong semiconductor investment myths“
- “Gen 3 semiconductor“
- “Three EDA oligopoly vendors: Synopsys, Cadence, and Siemens’s Mentor Graphics“
- “How does, the EDA oligopoly, Cadence make money?“
- “How does Synopsis, the EDA oligopoly, make money?“
- “How does the resurrected Dell make money?“
Disclaimer
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.
