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Broadcom stock forecast: Will AVGO share price soar after VMware bid?

10:29, 12 August 2022

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Will AVGO share price soar after VMware bid? Source: Shutterstock, g0d4ather

Semiconductor manufacturer Broadcom Inc (AVGO)’s stock price has been under-pressure in the past month as monetary tightening policy in the US and elsewhere intensified worries about recession

The recent sharp decline in the AVGO stock price came as the semiconductor giant could move ahead with the acquisition of cloud service provider VMware (VMW).

As of 11 August, the stock has recovered to $550.41 a share from $476 on 5 July, the lowest price this year.  Will Broadcom keep the momentum in its recovery, and what's the outlook of its proposed deal with VMware?

We look into the company’s price history, recent news and other factors that may shape a Broadcom  stock forecast.

What is Broadcom?

Broadcom (AVGO) is a global technology company that designs, develops and sells semiconductors and infrastructure software.

In February 2016 the firm changed its name from Avago Technologies Limited to Broadcom Limited after Avago Technologies acquired Singapore-based Broadcom in 2015.

The San Jose, California-based company operates in two segments: Semiconductor Solutions and Infrastructure Software.

Semiconductor Solutions provides a diverse range of semiconductors for data center, telecom, enterprise and embedded networking applications. It also offers radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market.

Infrastructure Software provides a variety of software products, such as mainframe software, distributed software, Symantec cyber security and payment authentication.

Broadcom’s software clients include banks, insurance organisations, government agencies, global IT services, telecommunication providers, educational institutions and health institutions. Its clients are mainly corporations with multi-vendor IT environments.

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Broadcom share price history

AVGO's stock price struggled through a volatile ride in 2020 amid the Covid-19 pandemic and the escalating US-China trade war, which impacted the semiconductor industry. 

The trade war culminated with US sanctions against China’s biggest chipmaker Semiconductor Manufacturing International Corporation (SMIC) in September 2020, first reported by the Financial Times

The stock gained more than 38% in 2020 despite it briefly plunged to $192 a share in mid-March during market sell-offs at the onset of the pandemic. 

It continued its upward trajectory over 2021, hitting the 52-week high at $677.76 on 28 December. Broadcom pleased investors with nearly 52% return on its stock value over 2021. 

Broadcom stock price, 2017 - 2022

The company’s robust financial performance in 2021 was one of the drivers for its stock’s rally. In the 2021 fiscal year, it booked total revenue of $27.45, a 15% increase from the year-ago period. 

In early 2022, the stock registered strong performance, trading at $670 in early January. However, the US Federal Reserve’s (Fed) monetary tightening with its aggressive rate hikes to curb inflation and fear of recession started to put pressure on chip stocks. 

The Broadcom stock price has been in choppy trading this year, but mostly on the downtrend, hitting several lows. It dropped to $554 level in May before briefly recovering to $608 in May.  The stock price continued to fall, hitting the lowest yearly price of $463 on 5 July. 

At the time of writing on 11 August, the AVGO stock price has fallen 17.40% this year, but gained 13.53% over one year. 

VMware bid likely to go ahead

On 26 May, Broadcom announced plans to acquire VMware (VMW), a leading provider of multi-cloud services, in a deal worth $61bn (£50bn). Under the proposal, AVGO will acquire all the outstanding shares of VMware in a cash-and-stock transaction and assume $8bn of its net debt.

Approximately 50% of VMware’s shares will be exchanged for cash consideration and 50% exchanged for Broadcom (AVGO) common stock.

“Upon closing of the transaction, based on the outstanding shares of each company as of the date hereof, current Broadcom shareholders will own approximately 88% and current VMware (VMW) shareholders will own approximately 12% of the combined company on a fully diluted basis,” a Broadcom statement said.

The agreement also provided a 40-day “go-shop” period in which VMWare and the Board of Directors could solicit alternative proposals. The period ended on 5 July 2022.

In its statement to the US Securities and Exchange Commission (SEC) on 6 July, the company said: “VMware’s Board of Directors continues to believe that the transaction with Broadcom is in the best interests of VMware and its stockholders.”

VMware did not disclose whether it received any alternative proposals during the “go-shop” period.  

The transaction could close in Broadcom's fiscal year 2023, subject to regulatory approvals and other customary closing conditions, including VMware shareholder approval. There is no set closing date for the transaction.

“By adding VMware, we will bring significant scale to Broadcom's software business and reinforce our position as a premier provider of mission-critical platform solutions to enterprises globally,” said Broadcom’s President Director and CEO Hock Tan in the earnings call on 2 June.

Tan added that the semiconductor giant has set a target for VMware to contribute approximately $8.5bn of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) once it’s integrated into Broadcom’s platform.

What is VMWare?

VMware was founded in February 1998 in Sunny, California, by five technologists: Diane Greene, Edouard Bugnion, Scott Devine, Mendel Rosenblum and Edward Wang. By the end of 1998, the company had 20 employees.

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In 1999, VMWare launched its first product, Workstation 1.0, which allowed users to run multiple operating systems as virtual machines, all on a single personal computer (PC).

Tech giant EMC Corporation acquired VMWare in 2004 – a year after VMWare opened its first international office in Europe. The transaction was worth $635m.

In 2007, VMware moved its headquarters to the Palo Alto campus in Stanford Research Park. On 14 August of the same year, the company went public on the New York Stock Exchange (NYSE) at $29 a share. 

In September 2016, Dell Technologies (DELL) acquired EMC Corporation, including its stake in VMware, for $67bn. Dell spun-off its 81% equity ownership of VMware in November 2021. 

Broadcom reports record second-quarter revenue

In the second quarter of 2022, Broadcom recorded a record $8.1bn revenue, up 23% from $6.6bn in the first quarter of 2021, the company announced on 26 May. It posted earnings per share (EPS) of $9.07.

The solid consolidated revenue was supported by strong growth in both businesses. In the second quarter, Broadcom’s Semiconductor solutions segment recorded revenue of $6.2bn, which accounted for 77% of total revenue, up from $4.8bn year-over-year. 

Its Infrastructure software segment rose to $1.87bn from $1.79bn a year ago. Broadcom generated $4.2 bn free cash flow and are expecting it to remain strong in the third quarter. 

“Irrespective of what you might think of where we are in the semiconductor cycle today, I do want to reassure you that the fundamentals of our business, both in semiconductors and in software have never been stronger,” Tan said at the earnings call on 2 June.

Broadcom’s board also approved a quarterly cash dividend of $4.10 a share. It was paid on 30 June. The firm also approved a new share repurchase program of up to $10bn-worth of its common stock through 31 December 2023. 

Upbeat outlook for the next quarter

Broadcom expected to book revenues of $8.4bn in the third quarter. Adjusted EBITDA was forecast at approximately 63.5% of the projected revenue. The company will announce the third-quarter results on 1 September.

Zacks analysts expected the company to post earnings of $9.62 a share in the third quarter, which would represent 38.22% year-over-year growth.  Zacks Consensus Estimate for revenue projected net sales of $8.41bn, up 24.01% from the year-ago period.

Broadcom was expected to earn $8.84 a share in the third quarter, according to analyst consensus estimates compiled by MarketBeat.

Macroeconomic headwinds

The macroeconomic headwinds and supply chain issues are likely to continue putting pressure on chip maker stocks and may be shaping AVGO stock forecast in the near future.

On 9 August, Broadcom’s rival Micron Technology (MU) lowered its guidance for the fourth-quarter revenue. The firm said that its fourth-quarter revenue may come in at or below the low end of the revenue guidance range of $7.2bn (+/- $400m) provided on 30 June.

The news had sent chip stocks slumping, including AVGO, which dropped 2.33% on the day to close at $532.80. 

Meanwhile, the global semiconductor industry is forecast to grow by 10% in 2022 to over $600bn for the first time ever, but the growth slows from 25% in 2021, according to a report by Deloitte

“We expect shortages and supply chain issues to remain front and centre for the first half of the year, hopefully easing by the back half, but with longer lead times for some components stretching into 2023, possibly well into 2023,” the report said.

The exit of one of Broadcom's executives also intensified the bearish sentiment. Thomas H. Krause, President of Broadcom Software Group, resigned from Broadcom effective 15 July, the company said in a filing. 

Krause, who played a key role in Broadcom’s proposed VMWare acquisition, has assumed the role as CEO at the combined company of Citrix System (CTXS) and TIBCO Software following Citrix’s acquisition by Vista Equity Partners and Evergreen Coast Capital. Broadcom’s stock dropped around 3% on 11 July following the announcement. 

Broadcom stock forecast: Analyst outlook and price targets

“We think Broadcom will gain significant value from its acquisition of VMware.”
by Abhinav Davuluri, Morningstar

Morningstar raised its fair value for Broadcom to $624 a share following the planned acquisition of VMWare and to $645 for the combined company.

“Yet we think Broadcom will gain significant value from its acquisition of VMware. Should the deal close, our fair value estimate for the combined entity would be $645 per share, which reflects cost synergies we think Broadcom can extract as well as the fact that we think the firm is acquiring VMware at an attractive valuation,” said Abhinav Davuluri, Morningstar’s sector strategist, in their Broadcom stock predictions on 27 May. 

A consensus rating of 26 analysts compiled by MarketBeat as of 11 August recommended a ‘moderate buy’ for the stock with four giving ‘hold’ ratings and 22 a ‘buy’. The analysts offered a 12-month Broadcom share price forecast at an average of $680.46, with a high price target of $780.00 and a low of $615.

All 12 analysts polled by TipRanks recommended a ‘buy’ for Broadcom stock, with a 12-month price target of an average $698.64, representing a potential increase of 26.93% from its closing price of $550.41 on 10 August. 

Morningstar, MarketBeat, and TipRanks did not offer a long-term AVGO stock forecast.

Algorithm-based forecasting service Wallet Investor provided such projections using AVGO’s historical data.  In its Broadcom stock forecast for 2022, the site expected the stock to trade at $621.261 in December 2022, as of 11 August. 

WalletInvestor’s Broadcom stock forecast 2025 suggested the stock could rise to $997.10  in December 2025. The site did not provide a Broadcom stock forecast for 2030. In August 2027, the stock price could surge to $1,174.042, according WalletInvestor

Note that analysts’ and algorithm-based price predictions can be wrong. Broadcom stock forecasts shouldn’t be used as a substitute for your own research. 

Always conduct your own due diligence before trading, looking at the latest news, technical and fundamental analysis, and analyst commentary. Remember that past performance does not guarantee future returns. And never trade money you cannot afford to lose. 

FAQs

Is Broadcom a good stock to buy?

Analysts ratings compiled by MarketBeat and TipRanks recommended the stock as ‘moderate buy’ and ‘buy’ as of 11 August. However, whether AVGO is a suitable investment for you should depend on your investment goals, risk tolerance, portfolio size and other personal circumstances. It's important to always draw your own conclusions about the company's prospects and possibility of meeting analyst targets. Remember that past performance does not ensure future returns. And never trade or invest money that you cannot afford to lose.

How high Broadcom stock can go?

A consensus rating of 26 analysts compiled by MarketBeat as of 11 August offered a 12-month Broadcom share price forecast at average $680.46 with a high price target of $780.00 and a low-price target of $615. Meanwhile, 12 analysts polled by TipRanks gave a 12-month price target of an average $698.64. Note that analyst predictions can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading.

Should I invest in Broadcom stock?

Your decision to invest in Broadcom (AVGO) should be based on your risk tolerance, investment objectives, portfolio composition, and experience in the markets. You should do your own research. And never trade money that you cannot afford to lose.

Further reading:

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