Broadcom for Xilinx, Mellanox? Or Just More Capital Returns?

Following U.S. President Donald Trump's order late yesterday ordering Broadcom (AVGO) to relinquish its hostile bid for fellow chip maker Qualcomm (QCOM), the Street is already asking what next mountain Broadcom might climb.

Shares of Broadcom are up $3.56, or 1.4%, at $266.40. Qualcomm shares are down $3.34, or 5.4%, at $59.47. NXP Semiconductors (NXPI), which Qualcomm has been in the process of acquiring for over a year, is up 22 cents at $123.84.

In Broadcom's brief statement last night, the company said it is "reviewing the Order," reiterating it doesn't believe the bid "raises any national security concerns."

But the Street seems ready to move on.

SunTrust Robinson Humphrey's William Stein reiterates his Buy rating on Broadcom shares, and cuts his price target to $335 from $344, writing that he expects a " relief rally " given the stock has sharply underperformed since the bid first came out, down 8% versus a 9% gain in the S&P 500.

But, "Longer-term, investors should understand that M&A has been a massive driver of AVGO's earnings growth & stock returns," he writes. "Expect the company to transition to another target in due time."

He notes the outperformance of Broadcom over the course of its acquisition streak:

Measured over the long term, AVGO has created tremendous shareholder value - largely through its M&A prowess. Over the last 5 years, AVGO has delivered 682% total returns, beating the SOX by 432% and the S&P by 603%. We remind investors that much of this out-performance (we estimate ~54% of its sales growth) is owing to AVGO's effective acquisition strategy (including LSI, Emulex, Broadcom, and Brocade).

Stein doesn't offer any M&A targets, writing that identifying such targets "has always been challenging," but offering that "the company likes inexpensive assets with strong franchises in markets with few competitors."

Stacy Rasgon of Bernstein writes that he thinks they'll find new targets, but they might also just pay out more to shareholders:

So what now? For Broadcom, we continue to like it with or without a Qualcomm deal. We believe the company's significantly increased FCF profile can and will be deployed in numerous ways to create value (from both further M&A, and cash return), with a cheap valuation accompanying best-in-class financials (an overview of our thesis can be found here.) To that end, we believe Broadcom can continue to find reasonable M&A targets (we believe Qualcomm is likely a special case; most potential acquisitions should not create NatSec concerns, especially after the redomiciling). We also wonder if cash return could be accelerated further. We note they are reporting earnings on Thursday; with numbers already guided for Q1 and Q2 the call could provide Broadcom with a forum to discuss next steps.

Craig Ellis of B. Riley offers more pointed suggestions: perhaps Xilinx (XLNX) or Mellanox Technologies (MLNX), while Micron Technology (MU) is too far afield and Nvidia (NVDA) is not the right strategic fit:

We believe AVGO's options start with a continuation of broadly-scoped communications- focused M&A. AVGO covets high-margin, technology-rich moderate growth businesses with complimentary end market and customer exposure. In that light, we believe M&A prospects could start with XLNX which appears well aligned. MLNX also seems possible, albeit relatively small. In our view, and contrary to some Competitor assertions, ADI and MXIM are not good fits. We see market concentration barriers with MRVL, QRVO, and SWKS and a market cap and strategic miss-alignment with NVDA. AMD raises interesting possibilities, though we're unsure if INTC x86 cross licensing could survive a change in control. We believe Memory, either MU or WDC, are unlikely as too far afield. Notably, AVGO's repeatedly surprised with acquisitions our expected semiconductor scope (i.e. with Emulex and Brocade) so we couldn't rule out another similar such move for a hardware company that's rich in chip and software content. So, multiple deals could be possible in the next 12-18 months.

Like Rasgon, he offers the company could also just choose to give back a lot more cash:

Alternatively, even more aggressive direct excess cash return is possible. AVGO's 12.6x CY18 P/E is presently the second cheapest of all SOX constituents. While we believe mgmt and investors remain interested in the exceedingly successful growth through acquisition strategy, we point to TXN as a leading example of valuation multiple and share out-performance under a highly predictable stock repurchase and dividend increase cash return strategy. For AVGO, every $5.0B in share repurchase is worth 19M shares or 4% of outstanding. We believe this shift is unlikely, but believe robust value creation potential exists if well-executed.

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

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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