Why Broadcom Dipped After Solid Earnings

“We concluded the year with strong fourth quarter results driven by continued demand for networking from cloud and for broadband from service providers as well as the significant ramp in wireless, even as enterprise demand remained soft.” — Broadcom CEO Hock Tan

Chip maker and software infrastructure provider Broadcom shares tumbled after the company warned of slow demand for the products it slings to enterprise customers, and restructured its executive team. Shares of Broadcom [$AVGO] dipped 1.9% in aftermarket trading, despite beating consensus estimates, and projecting better-than-expected earnings for Q1.

Broadcom put up fiscal Q4 net income of $1.32 billion, which shakes out to $2.93 a share, compared with a net profit of $847 million, or $1.97 a share in 2019. Adjusted for items such as stock-based compensation, non-GAAP earnings were $6.35 a share, and sales rose to $6.47 billion from $5.78 billion a year ago. The consensus estimate was for adjusted earnings of $6.25 a share, on sales of $6.43 billion.

A $1/share increase in the annual dividend to a rate of $14/share is certainly possible. If so, that would be a 7.7% increase, and would give a forward yield of 3.8% based on Monday’s $366.10 close.

Make no mistake, synergies from the buyouts of Brocade, CA and Symantec’s enterprise security business are sought to have bolstered Broadcom’s fiscal Q4 performance. Decidedly, Symantec’s enterprise security business shelled out more than $400 million to revenues in Q3 fiscal 2020. Moreover, revenues from Brocade and CA improved 3% and 6%, respectively, on a YOY basis.

Broadcom’s chip business announced sales of $4.83 billion, a 6% gain from the 2019. Infrastructure software sales rose 36% to $1.64 billion, and the Street forecasted chip sales of $4.78 billion and software sales of $1.63 billion. Broadcom’s chip business sells products that assist with wireless connections in iPhones and makes chips for directing information flow inside data center.

The company said that it expected Q1 sales of $6.6 billion, which clocked in above Wall Street estimates of $6.5 billion. Thursday, Broadcom added that it had appointed Kristen Spears to the CFO job, and Charlie Kawwas to the role of chief operating officer. Broadcom’s current CFO, Tom Krause, will become president of the infrastructure software group. The company said it was raising its target dividend by 11% to $3.60 a share, for each fiscal quarter in 2021. Broadcom stock has increased 30% in 2020, as the PHLX Semiconductor index jumped 50%.

At the end of Q3, a total of 59 of the hedge funds held long positions in this stock, a change of 0% from the previous quarter. The graph displays the number of hedge funds with bullish position in AVGO over the last 21 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

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