Broadcom: What a Solid Quarter

Not all technology stocks are struggling. Broadcom’s (NASDAQ: AVGO) solid fourth-quarter beat affirms the upside potential. And while the headwinds in the stock market may prevent AVGO stock from rebounding back to old highs in the $250 - $275 range, the stock is worth watching.

Broadcom reported revenue growing 12% Y/Y. It guided FY19 revenue of $24.5 billion, $2 billion above consensus, with operating margin at 51%. It beat revenue consensus in all segments except Wired Infrastructure. Wireless communications, Enterprise storage, and Industrial/Other all exceeded expectations.

Broadcom’s acquisition of the CA business is the only risk factor that may hold the stock price down. The CA unit may have goodwill and a revenue slowdown that will weigh on results. Still, management is bracing for a hardware sales slowdown beyond FY2019.

Management said CA will add meaningfully to profitability. 70% of CA’s revenue are from top 500 accounts who license CA mainframe products for over a decade. That consistent source of revenue justifies the debt it is taking on. Already at $2.5 billion a year in operating profitability from CA, management thinks revenue will stabilize at $3.5 billion a year and will grow from there.

At a P/E of 23 times and a forward P/E of 10.4 times, AVGO stock is worth a consideration at these levels.