Estimated read time: 4 minutes
Publication date: 28th Jun 2022 11:16 GMT+1
In this current market of high inflation, rising interest rates, and the threat of a possible recession, it has become challenging to invest without losing money. The tech sector has borne the brunt of this situation as several high-growth tech stocks have crashed in 2022.
California-based semiconductor company Broadcom (NASDAQ: AVGO) is no exception. Its stock has lost around 25% of its value so far this year giving in to the market’s volatility. However, a case can be made that Broadcom offers a good investment opportunity amidst all these market sell-offs on account of its solid potential. Over the years, Broadcom has evolved into an infrastructure software giant and is currently one of the leaders in the world in 5G Networks.
Broadcom has grown via partnerships and acquisitions
One of the easiest ways to ace today’s market is by acquiring organizations that have already proven their worth. Broadcom has adopted this approach successfully and through a series of acquisitions over time has become one of the world’s largest infrastructure software giants.
Broadcom entered the software business back in 2018 by purchasing CA Technologies. A year later it acquired Symantec’s enterprise security business. Last month, Broadcom announced the acquisition of VMware (NYSE: VMW) for $61 billion, a company operating in the cloud management and infrastructure solutions segment.
Once the acquisition is completed, Broadcom’s Software Group will rebrand itself and then operate as VMware. Further, it will incorporate its existing infrastructure and security software solutions as part of the expanded VMware portfolio. Broadcom believes this acquisition will help it in enhancing its existing business in general.
Further, Broadcom’s latest alliance with Meta (NASDAQ: FB) is another example of a partnership between a software and hardware business provider. Through this alliance, the company will be bringing its semiconductors into the metaverse with the help of Meta.
A look at Broadcom’s solid financials
Broadcom has been doing quite well financially. In the second quarter of fiscal 2022, the company’s revenue rose by 23% year over year to $10.3 billion while net income surged to $2.59 billion or $5.93 per share. Its adjusted EBITDA stood at $5.11 billion.
Broadcom continues to enhance shareholder wealth and paid $4.5 billion to shareholders in Q2 which includes $1.7 billion via dividends and the rest in the form of share buybacks.
For the second quarter, it had a cash and equivalent balance of $9 billion and its free cash flows came at $4.2 billion.
AVGO will benefit from growth in the semiconductor market
The semiconductor industry is huge and has immense prospects. The demand for semiconductors has been on a rise over the years as most electronic devices such as cars, electronic devices, data centers, and industrial machines require them in the form of a key manufacturing component.
So, as the demand for these products increases, there will be a proportionate increment in the demand for semiconductors as well. As per Fortune Business Insights, the global semiconductor market which was measured at $452.25 billion in 2021 might reach $893.10 billion in 2029 growing at a CAGR of 9.2% between 2022 and 2029, making Broadcom a top bet for the upcoming decade.
Broadcom stock is trading at $506 while analysts have a 12-month average price target of $700 which is almost 40% above its current price. It also offers a forward yield of 3.3% making it attractive for growth and income investors.
Broadcom has huge prospects, especially with respect to its play in the 5G infrastructure upgrades. Its financials are pretty good and in this inflationary market, its decent dividend payouts are something worth looking at. The stock is pretty cheap now and is trading at almost 25 times its earnings. So, anyone who wants to get hold of a tech stock with some solid potential and having decent financials can prefer to add this stock to their portfolio.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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