After bottoming at around $200 a share and recovering slightly last week, Broadcom’s (NASDAQ: AVGO) nearly 20% monthly drop may have created an entry point for investors. Management’s decision to spend a whopping $18.9 billion for CA Technologies (NASDAQ: CA) is spooking investors. And rightfully so. Shareholders have much to worry about.
AVGO is taking on a massive $18 billion in debt to fund the CA buyout, which it is paying at a 20% premium. The deal will raise long-term adjusted EBITDA margins to 55 percent and add to EPS. The fundamental problem is not in the numbers: software businesses are normally high profit-margin. With AVGO, CA’s core business has no overlap or synergies with it.
This problem runs contrary to what the accounting numbers say. If CA’s business slows and the bought out company does not grow profitability through cost cuts, then AVGO will end up writing down its goodwill. Despite the stock’s 20% discount, investors may want to avoid the stock for the time being.
The disparity between the PE (42x) and forward P/E (10x) is due to markets expecting too much in the company’s future growth. Investors could instead take advantage of Skyworks Solutions’ (NASDAQ: SWKS) drop on the markets last week, but Qualcomm (NASDAQ: QCOM) or hold cheap memory chip suppliers.
Tech Insider
