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Proprietary Data Insights Financial Pros’ Top 2nd Tier Semiconductor Stock Searches in the Last Month
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TrackStar Identifies Undervalued Semiconductor Stock |
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AI is 2023’s hot topic. It’s sent stocks like Nvidia (NVDA) through the stratosphere. It’s dragged along other semiconductor stocks like Broadcom (AVGO), which saw a significant search boost amongst retail investors and financial pros as did many of its peers. Yet, AVGO stood out because it’s not what we would consider an AI play. But it’s the top search by financial pros in a group we called ‘tier 2’ semiconductors, which aren’t the most popular. Why would we look down the chain? NVDA 56x forward earnings and cash, 25x forward earnings, and 20x forward cash. Plus, most folks forget, but other macro trends continue to run strong. And Broadcom is positioned to capitalize on one of the biggest out there. Broadcom’s Business It goes without saying that Broadcom makes semiconductors. So, what’s different about them versus Nvidia or AMD? Instead of catering to AI and the PC market, Broadcom sells to data centers, enterprise networking, telecommunications, broadband, industrial, automotive, and consumer electronics. Broadcom’s chips go into integrated circuits, system-on-chips, and other specialized chips used in networking, storage, broadband, and connectivity applications. The company’s products are often used in infrastructure equipment, smartphones, set-top boxes, modems, routers, switches, and other devices requiring high-speed communication and connectivity. Revenues are divided into two categories, as shown below:
Source: Q2 2023 Investor Presentation Broadcom sits at the forefront of the 5G as ibe if the leading suppliers of radio frequency components for wireless devices and infrastructure. To give you an idea, Apple announced a multi-year multi-billion dollar agreement with Broadcom to develop components for its hardware. Additionally, management estimates 5G-related revenue to grow from $2 billion in 2020 to $6 billion this year. Financials
Source: Stock Analysis Network buildouts helped Broadcom achieve healthy double-digit revenue growth over the last few years. That’s helped the company expand its margins. While growth margins increased from 56.7% to 67.7%, profit margins skyrocketed from 11.1% to 38.7%, giving the company a current free-cash-flow margin of 48.8%. Total debt increased in 2019 from $17.5 billion to $32.8 billion, largely tied to acquisitions. Since then, total debt has dropped to $39.4 billion with net debt standing at $27.9 billion, costing them $1.6 billion in annual interest payments. The $14 billion in free cash flow helps them pay the 2.12% dividend yield, which has grown at 38% annually since 2016, which costs them around $6.7 billion annually. Plus they spent $8.5 billion on share repurchases last year. Considering their interest payments are around 4%, we’d like to see them do more to pay down the debt rather than pay out a dividend. Valuation
Source: Seeking Alpha Compared to high-growth semiconductor companies like Nvidia, Broadcom is cheap. But, next to the second-tier semiconductors, it’s one of the more expensive, whether looking at the forward P/E or price-to-cash flow. That makes sense only if it has the growth to support the valuation. Growth
Source: Seeking Alpha Overall, we’d say Broadcom delivers the revenue and earnings growth to justify its multiples. Yet, it’s hard to look at companies like Marvell Technologies (MRVL) and wonder why it isn’t profitable. And amongst the group, Micron (MU) looks downright dismal. Profitability
Source: Seeking Alpha What we can say is Broadcom’s margins trounce its peers, while its returns on equity, assets, and total capital are just fantastic. Our Opinion 8/10 Broadcom isn’t overvalued at these levels. In fact, it trades at a discount. But we’d like to see a pullback for an entry. The company consistently delivers revenue growth, cash flow, and maintains its margins. It may not grow as quickly as Nvidia, but it’s a solid company all the same. |
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