A Baird analyst has raised his price target on Broadcom (NASDAQ:AVGO) to US$300 from US$290 and tagged the stock as his new “large-cap semiconductor idea” after the chipmaker and hardware provider reported fiscal third-quarter profit that came in ahead of Wall Street’s estimates.
Tristan Gerra is getting behind Broadcom, as he expects its RF chips, used in high-end phones, will see a resurgence and return to double-digit growth by 2020 driven by the advance of 5G wireless networks. Sticking to an Outperform rating on its shares, the Baird analyst is also bullish about the company’s application-specific integrated circuits as well as its storage products.
“Broadcom emerges as a particularly attractive, value stock compared to more cyclical semi names,” wrote Gerra in a note to investors. “Broadcom should benefit from a major next-gen WiFi smartphone win [ in the first half of next year], along with the potential to regain RF [chip] share late next year.”
Read: Baird analyst slashes price target on US chipmaker Micron Technology
Broadcom’s move last July to buy the enterprise software firm CA for US$18.9bn creates the potential for up to 20% in upside to its earnings, according to Gerra, as cross-selling with CA’s large-enterprise customers is likely to push up profits.
Broadcom’s acquisition of CA combines a top chipmaker with an IT mainframe group.
Analyst Rick Schafer of Oppenheimer is also keen on the CA deal given the company’s dominance in the mature mainframe segment. “We see the financial rationale behind the accretive deal,” he wrote in a note to investors. “The mainframe business is a sticky, high cash-flow business where CA enjoys 25-30% of the market behind IBM’s 50%.”
Keeping an Outperform rating and a US$315 target on the stock, Schafer expects Broadcom will keep CA’s core mainframe business, which accounts for two-thirds of its revenue, while pruning its remaining non-core and high-cost assets in security, analytics and development operations.
3Q earnings surpass expectations
For its fiscal third quarter, Broadcom posted net income of US$1.2bn, or US$2.71 per share, up from US$481mln or US$1.14 per share in the year-ago quarter. On an adjusted basis, its earnings came in at US$4.98 per share. Its net revenue, meanwhile, jumped 13% from last year to US$5.06bn.
Revenue from Broadcom’s enterprise storage business soared 70% in the quarter, helped by its acquisition of Brocade.
But its wireless business, which manufactures chips for WiFi as well as GPS and Bluetooth, saw its revenue flatline as sales of the latest models of iPhones were offset by declines in Samsung phone sales, Oppenheimer’s Schafer pointed out.
Analysts had expected Broadcom to earn US$4.83 per share on revenue of US$5.06bn.
Looking ahead to the fourth quarter, Broadcom projects it will see revenue of U$5.33bn to US$5.48bn.
Broadcom shares traded 4.2% higher at US$225.00 in Friday’s pre-market session.