Broadcom (AVGO) Selling Off Despite Strong Quarter

Broadcom Inc. (AVGO) is trading lower by more than 2% in Friday's pre-market after beating fourth quarter 2020 earnings estimates and reporting in-line revenue. The fifth largest semiconductor company trading on U.S. exchanges posted a profit of $6.35 per share, while revenue rose 12.0% to $6.47 billion. Strong metrics and higher first quarter revenue guidance failed to stir buying interest, but the stock posted an all-time high just four sessions ago.

Key Takeaways

  • Broadcom has sold off despite beating fourth quarter 2020 profit estimates and reporting in-line revenue.
  • The stock is extremely overbought following an August breakout and 35%-plus rally wave.
  • Wall Street price targets are well above current action and should place a floor under price quickly.
  • A decline into the $380s could offer a low-risk buying opportunity.

The stock has gained nearly 10% in the past month and 30% year to date despite the short-term downside, benefiting from its close relationship with Apple Inc. (AAPL) as well as strong cloud computing growth. Broadcom raised an already respectable dividend to $3.60 per share during the release, which translates to a 3.5% yield. The company also took a giant step in building a succession plan for CEO Hock. E. Tan, who has held the post since March 2006.

Wall Street consensus on Broadcom has been highly bullish for years, now translating into a "Strong Buy" rating based upon nine "Buy" and two "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $400 to a Street-high $490, while the stock is set to open Friday's session just $2 above the low target. Fresh buying interest could develop quickly, given this humble placement.

Succession planning is a strategy for passing on leadership roles – often the ownership of a company – to an employee or group of employees. Also known as "replacement planning," it ensures that businesses continue to run smoothly after a company's most important people move on to new opportunities, retire, or pass away.

Broadcom Long-Term Chart (2011 – 2020)

Chart showing the share price performance of Broadcom Inc. (AVGO)

Avago Technologies acquired the original Broadcom in 2016, and the long-term chart follows that company's price action. A steady uptick topped out at $39.45 in 2011, giving way to a narrow consolidation pattern with support in the mid-$20s. The stock broke out in 2013 and entered a healthy trend advance, lifting just above $150 in the second quarter of 2015. It broke out once again in 2016, carving a rising channel pattern into the November 2017 high at $285.68.

The stock fell to a 17-month low in the summer of 2018 and turned higher, returning to the prior high in February 2019. An immediate breakout failed in May, yielding sideways action that crisscrossed the contested level for several months. It returned to resistance at year end and plunged with world markets during the first quarter's pandemic decline, getting cut in half before posting a four-year low in the $150s.

A V-shaped recovery wave reached the first quarter peak in June, ahead of an August breakout that added more than 35% into the Dec. 8 all-time high at $426.70. Friday's sell-the-news reaction makes sense given this buying spree, with extremely overbought technical readings favoring an intermediate correction that lasts well into the first quarter of 2021. A trip down to the 50-day exponential moving average (EMA) above $380 could offer a low-risk buying opportunity in this configuration.

A technical correction, often called market correction, is a decrease in the market price of a stock or index that is greater than 10%, but lower than 20%, from the recent highs. It can also apply to other securities where the key characteristic is the 10% to 20% counter to the prior move.

The Bottom Line

Broadcom stock is selling off after another strong quarter, indicating that overbought technicals are coming into play following a four-month 35% rally.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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