Unlock: Broadcom (AVGO) – 3 Point Bull Case Into Earnings Pays Off
It pays to do fundamental research. Here is bullish view presented to clients on May 17 in AVGO based on 3 points: 1) Earnings momentum, 2) Synergies from Brocade acquisition, and 3) iPhone 8 charging. Big breakout today to new 52-week high after earnings. To learn more about our approach and how you can become a successful trader, sign up for 4 week trial and test drive live chat room with some of the best traders: SUBSCRIBE
May 17, 2017
Broadcom (AVGO) – Reports earnings on June 1. On this weakness with stock down -2.3% today with broad market, large bull is stepping in making specifically an earnings bet with 5,500 June (9) Weekly 252.5/267.5 call spread bought for $1.37. Approx $753,000 bullish bet.
Several moving parts here:
Earnings Momentum Strong – This bull steps in after research firm Instinet this morning posted a bullish view expecting company to beat earnings estimates, and raised price target. Instinet bull case is based on continued momentum from last quarter which was very strong. As reported on March 1:
– Q1 EPS $3.63 vs. $3.46 estimate, beat
– Q1 Revenues $4.14B vs. $4.08B estimate, beat
– Q2 Revenue Guidance $4.1B vs. $3.9B estimate, beat
Since that quarter we have seen Semiconductor Industry Association (SIA) report March industry sales accelerated sequentially by +1.6% MoM and grew +18% YoY. Units were up +16% and ASPs were up +2% YoY. This is the 8th consecutive month of accelerating YoY growth for overall semis sales. This should translate into good earnings on June 1.
Brocade Acquisition Expected to Clear Hurdles – Separately and likely more important catalyst is closure of $6 billion deal with Brocade. Back in January 2017, the CFO presented at Consumers Electronic Show and discussed divestiture of IP Networking business. As a reminder, Broadcom bought Brocade for $5.9 billion back in late October and immediately announced that it will split the company in two, retaining its core storage area networking business and selling off its IP networking section so Broadcom does not compete with downstream customers. Broadcom’s main interest in acquisition of Brocade was only in its fibre network business. That deal caught scrutiny from FTC with multiple document requests on Feb/Mar period. While FTC still hasn’t cleared yet but on May 9 the EU regulators approved the deal, which sets a positive precedent for FTC to clear by July 2017. Once this acquisition closes, expect forward estimates to move even higher based on expected $750M cost synergies which translates into $2.00 EPS upside.
iPhone 8 Wireless Charging – This is the wild card with material upside that nobody has in consensus models. One of the biggest features that many are anticipating in upcoming iPhone 8 is wireless charging through wifi. On February 17, JP Morgan discussed this AVGO has been working with Apple on creating a solution. JPM says:
“Based on our research efforts and triangulating recent industry news, we believe that Broadcom, working with Apple, has developed a chip solution that will be used to power the wireless charging functionality on the iPhone platform. Although it is unclear whether Apple will add the wireless charging capability on the iPhone 8 (we believe Apple will likely be prudently cautious around new battery/power related features given what happened with the Samsung Note 7), we are confident that when Apple decides to embed the capability in the iPhone, it will be a Broadcom based solution. We believe at full run-rate this wireless charging design win could add $500-$600M+ in annualized revenues (and add to a mobile dollar content growth CAGR that is currently trending at a double-digits percentage rate).”
