(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Broadcom Inc. (AVGO) have struggled for most of this year, but now it's showing signs of life. The company's shares have risen about 7 percent since the middle of May, and technical analysis suggests that Broadcom is ready to rise 7% higher to $275.
So, maybe life without Qualcomm Inc. (QCOM) won't be so bad for Broadcom after all. If you recall, President Trump blocked Broadcom's bid to buy Qualcomm on national security grounds.
To be sure, Broadcom's stock still has a way to go to fully recover. It's still down more than 9.7 percent from its one-year high. But the earnings outlook is bright in the short term. The company is expected to report fiscal second-quarter earnings on Thursday after the close of trading. Analysts are looking for the company to say that revenue rose by about 19 percent to just over $5 billion, up from $4.201 billion a year ago. Meanwhile, earnings rose an estimated 28.4 percent to $4.74 up from $3.69 per share a year ago. In mid-May, options traders bet heavily that shares of Broadcom would rise to $270 by the middle of June, and the stock has been moving in that direction. (See: Broadcom Traders Bet on 12% Rebound)
The technical chart for Broadcom suggests shares of the stock are nearing a breakout, with the shares rising above a multi-month downtrend that has been in place since the end of November. The chart suggests that Broadcom's shares could rise to their next level of resistance around $275. Additionally, the relative strength index has broken out of a downtrend and indicates positive momentum is building. Volume has also started rising over the last few trading sessions, another positive indicator as well.
Discount to Peers
Broadcom has another advantage the bulls like. Its shares trade at 12.7 times estimated 2019 earnings, well below the average of the top 25 companies in the iShares PHLX Semiconductor ETF (SOXX) of 15.9. The low multiple may reflect a key weakness that could hold back the stock: Broadcom's earnings per share growth is expected to decelerate sharply to 3.8 percent in 2019 on revenue growth of 3.5 percent.
Analysts See Shares Rising
Even with that slowdown ahead, analysts are bullish on Broadcom and see shares rising over 21 percent to more than $311 a share. Of the 37 analysts who cover the stock, nearly 92 percent rate it a "buy" or "outperform. Whether that bullishness is justified may be determined by Broadcom's upcoming results, and especially by management's outlook for the rest of 2018.
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.