Broadcom's (AVGO 0.67%) stock price jumped 8% following the release of its fiscal 2021 fourth-quarter results earlier this month, as the chipmaker reported impressive growth in revenue and earnings that helped it crush Wall Street estimates.
Investors apparently appreciated Broadcom's plan to return more cash by way of share repurchases and dividends. They also took note of the fact that the company's terrific growth momentum is likely here to stay, as its guidance turned out to be substantially better than expectations.
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Broadcom's outstanding display led Wall Street analysts to increase their price target on the stock, with KeyBanc analysts now expecting shares to hit $710 compared to the earlier target of $575. I think the company's tailwinds indicate that the stock could deliver even stronger returns. Let's look at the reasons why.
Broadcom is firing on all cylinders
Broadcom's Q4 revenue increased 15% year over year to $7.4 billion, topping the consensus estimate of $7.35 billion. The company's adjusted earnings increased 23% over the prior-year period to $7.81 per share, which was better than Wall Street's expectation of $7.74 per share. More importantly, Broadcom's guidance was well ahead of what investors were looking for.
The company anticipates $7.6 billion in revenue this quarter, which would translate into 14% year-over-year growth, while analysts were looking for $7.3 billion in revenue. Broadcom's strong numbers and guidance can be attributed to the terrific demand for its chips that are used in several verticals such as broadband, networking, wireless connectivity, server storage, and the industrial market.
The semiconductor solutions business produced 76% of Broadcom's total revenue last quarter. The segment's revenue jumped 17% year over year thanks to the robust end-market demand from the above-mentioned markets.
The networking business, for instance, recorded 13% year-over-year growth as the demand for Broadcom's routers and switches increased on the back of 5G infrastructure rollouts and hyperscale data center deployments. The networking business accounted for 34% of the semiconductor solutions segment last quarter, and the good part is that it is all set to step on the gas and record 30% year-over-year growth in the first quarter of 2022 as Broadcom's customers ramp up orders.
Meanwhile, the server storage and broadband businesses that together account for 31% of the company's semiconductor revenue are also in fine form. The server storage business shot up 21% year over year as the demand for faster storage in the cloud increased and enterprises upgraded their infrastructure. Broadcom expects the upgrade cycle to continue and drive 30% year-over-year growth in the server storage connectivity business this quarter.
The broadband business is also benefiting from an upgrade cycle, with the segment's revenue increasing 29% year over year last quarter. Broadcom pointed out that service providers are upgrading their networks to allow for faster data speeds and increased bandwidth, a trend that's likely to continue in the current quarter and boost the broadband business' revenue once again.
More reasons to buy
Broadcom management believes that the company is on track to maintain its impressive growth thanks to its strong position in the markets in which it operates. Management also added on the latest earnings conference call that Broadcom would continue to invest "heavily in our next-generation products to maintain and even increase our leadership across all our franchises."
Throw in the fact that Broadcom has bumped up its dividend by 14% to $4.10 per share and has announced a share repurchase program worth $10 billion, and it becomes evident that the stock can add to investors' wealth in more ways than one. Broadcom now has a forward dividend yield of 2.60%, which is impressive as it is more than double the S&P 500's dividend yield of 1.26%.
So, investors can enjoy a mix of stock price appreciation and a regular income stream with Broadcom. However, buying this stock won't be cheap; it is trading at 44 times trailing earnings, though the forward earnings multiple of 20 points toward robust earnings growth.
Moreover, as Broadcom has a lot going for it in the semiconductor business, is on track to return substantial cash to investors, and is expected to deliver more upside, it still appears a solid pick for investors looking to add a semiconductor stock to their portfolios.
