Broadcom (AVGO) Signals Rough Road Ahead: Should You Offload?

If you are still holding on to shares of Broadcom Limited AVGO in your portfolio, it is time you dump them as chances of favorable returns in the near term appear bleak.

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. One such stock is Broadcom which has witnessed a significant price decline on a year-to date basis and negative earnings estimate revisions for the current quarter and the year. Further, the company’s Zacks Rank #4 (Sell) only reflects its innate weakness.

Notably, the stock has returned just 4.6% on a year-to-date basis, substantially underperforming the industry’s rally of 21.6%.

Let’s delve deeper and analyze the factors dragging the company down..

Why Broadcom Should be Avoided

Broadcom shares declined more than 5%, on Jun 14, 2019. The company lowered outlook for fiscal 2019. Broadcom now forecasts non-GAAP revenues of almost $22.5 billion (previously $24.5 billion). The Zacks Consensus Estimate for the same is pegged at $24.32 billion.

Along with a tepid fiscal 2019 guidance, the company provided mixed results for second-quarter fiscal 2019. Although Broadcom had reported non-GAAP earnings of $5.21 per share which beat the Zacks Consensus Estimate of $5.17, revenues of $5.517 billion missed the Consensus mark of $5.663.

The company operates in a highly competitive market. Broadcom faces significant competition in most of its operating markets that negatively impacts the top line. Pricing pressure also keeps margin under pressure. In the FBAR technology market, the company faces significant competition from Skyworks surface acoustic wave (SAW) filters. Well-established companies like Cavium and Intel (INTC) are its competitors in the wired infrastructure market. We expect intensifying competition to keep profitability under pressure at least in the near term.

Further, ballooning debt levels adds to the risk of investing in the company and remains a potential headwind. As of May 5, 2018, the company had total net debt of $28.67 billion as compared with $29 billion reported in the last quarter.

For the full year 2019, four estimates have moved south in the past 30 days. This trend has caused the consensus estimate to trend downward from $23.19 per share to its current level of $23.07.

Additionally, for the current quarter, Broadcom has seen three downward estimate revisions, dragging the consensus estimate down to $5.69 per share from $5.75 per share in the past 30 days.

Moreover, due to the significant exposure, Broadcom’s share price movement depends heavily on Apple’s results (primarily on iPhone’s performance), which doesn’t bode well for the investors.

Further, Broadcom CEO Hock Tan stated in the earnings release, “We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties.”

So, it may not be a good decision to retain this stock in your portfolio anymore, at least if you don’t intend to wait for a long time.

Key Picks

Some better-ranked stocks in the broader technology sector are Match Group, Inc. MTCH, Universal Display Corporation OLED and Autohome Inc. ATHM, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Match Group, Universal Display and Autohome have a long-term earnings growth rate of 15.2%, 30% and 20.9%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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