(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Broadcom Inc. (AVGO) shares have fallen hard since announcing it would buy CA Inc. (CA) for nearly $19 billion in July, with the stock dropping by 13.5%. But the worst may not be over for Broadcom, with shares poised to fall by another 8%, based on technical analysis, from its current price around $217. Should that happen, shares would be down by more than 22% on the year.
The technical chart isn't the only issue facing the company: The outlook for the business presently looks weak, too. Throw in questions that are swirling on how the chipmaker is going to integrate software company CA into its existing business, and there is enough weighing on the stock that can make even the most bullish investors skeptical.
Weak Technical Pattern
The technical chart for Broadcom is weak and is suggesting the stock will fall to roughly $199, a drop of more than 8% from its current price of $216.85. Shares gapped 14% lower following the surprising news the company would be acquiring CA. The stock attempted to rebound and refill the technical gap but failed at a technical resistance level at $227 on multiple attempts. Now the stock is poised to drop back to technical support at $199.
It isn't just the technical patterns flashing the warning signs. The relative strength index (RSI) also suggests the stock has further to drop. The RSI has been trending lower since early June, and despite already hitting oversold levels in mid-July with the index falling below 30, the trend has been unable to reverse and move higher. The negative direction of the trend suggests there is still bearish momentum in the stock.
Weak Profit Outlook
The company's growth outlook is pretty bleak, with earnings forecast to climb by only 3% in fiscal 2019 and revenue to grow by only 3.4%. That is a big slowdown from what is expected to be strong earnings growth of about 23% in 2018 and revenue growth of roughly 17.6%.
Shares of the stock look cheap enough, trading at 10.6 times fiscal 2019 earnings estimates of $20.57 per share. However, the low earnings multiple is likely a reflection of the expectations for lackluster growth.
With all the questions swirling around Broadcom and its acquisition of CA, and a growth outlook that appears to be less than impressive, the stock is likely to trade more off of the technical chart than anything else. That likely means shares will continue to fall over the short term until the company can provide a positive update.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.