Chipmaker Broadcom Doesn't Need Apple To Rebound

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Broadcom Ltd. (AVGO) shares are surging by nearly 4 percent and may rise further, perhaps back to its previous highs, which is about 14 percent higher than its current price of $250. The stock has found technical support, allowing it to experience a meaningful bounce. That bounce is getting a boost after the company issued better-than-expected guidance for it upcoming fiscal first and second quarters of 2018. 

Shares of Broadcom have fallen since the end of November as investors went back and forth on the fate of Apple Inc.'s (AAPL) newest and most expensive phone, the iPhone X. But the recent guidance from Broadcom suggests the company is flourishing without Apple, as its non-wireless business units continue to thrive. 

A Strong Rebound Is In The Works

The chart shows that AVGO stock has found a meaningful level of support around $240. And should the price rise above $260, it could see a significant increase back to its old high near $285. The chart suggests resistance lies around $259, and a rise above the downtrend and resistance would signal a technical breakout. 

Improving Business Outlook

Broadcom said it expects revenue of $5.325 billion at the mid-point for its fiscal first quarter ending February 4. That's fractionally ahead of analyst estimates of $5.302 billion. 

But the big news is that the company also estimates revenue for the second quarter of $5 billion, which is nearly 11 percent above analyst estimates of $4.497 billion, according to YCharts. 

The strength of Broadcom's business is attributed to its wired and storage segments, while the company expects to see a greater than seasonal decline in wireless. Broadcom's wired and storage business segments accounted for roughly 58 percent of its total revenue in the fourth quarter, while wireless accounted for about 37 percent. 

Life Beyond Apple

It is worth noting that in first, second and third quarters of 2017, wireless activity only accounted for 29 percent of Broadcom's total revenue. This means the bump the company saw in the fourth quarter was likely due to Apple and the recent launch of the iPhone X, since Broadcom gets about 20 percent of its total revenue from Apple, according to SEC documents

The latest guidance figures suggest Broadcom is seeing strong growth in its business units outside of Apple. This means that despite all the hand-wringing about the iPhone X's underwhelming sales, Broadcom is doing fine without Apple, and Apple may play a smaller role in its 2018 financial results. (See also: Apple iPhone X Orders Weakening: JPMorgan.)

While the market still awaits what Apple will say regarding its iPhone sales numbers, one thing seems clear: Broadcom is doing fine on its own. 

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 holdingsInformation 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. 

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