As Broadcom plunges, taking chip sector with it, analysts urge calm: 'The sky is not falling'
- "Most companies have been seeing weakness for a while, which was at odds with AVGO maintaining their FY guide last quarter," Barclays said.
- "Broadcom's reduced full-year revenue guidance is dismissing the 2H recovery thesis articulated by many semiconductor companies earlier this year - ignoring at the time high and still-rising inventories," Baird said.
The financial fallout from the U.S.-China trade war is beginning. But a day after after chipmaker Broadcom reported disappointing earnings, Wall Street analysts are urging investors to stay calm.
The report sent chip stocks plummeting after the company cut its revenue forecast, citing Huawei and trade uncertainty. Broadcom said it was taking a $2 billion annual sales hit due to the trade battle.
Shares of Broadcom were down 7% to $260.17 in early market trading.
"Here's the bottom and it ain't that bad," Citi analyst Christopher Danely said in his note to clients. He kept his buy rating but lowered his price target to $300 from $320.
Other analysts agreed.
"Net net, the lower fiscal year is a bigger revision than what was expected but we don't believe the sky is falling and we still think the strong capital return story keeps a bottom in the stock, and hopefully the 2H proves conservative should the trade tensions resolve," said Barclays analyst Blayne Curtis.
One firm lowered its price target but still thinks the company can weather the storm.
"Broadcom is well positioned in this cyclical downturn, owing to its fabless model, company-specific growth catalysts, revenue diversification, and software revenue stability," analysts at Baird said. "Combined with strong cash flow generation and an attractive multiple, we view Broadcom as a defensive, highquality name." The firm took their price target to $280 from $300.
Here's what else the major analysts are saying:
Barclays- Overweight rating, price target to $315 from $360
"Reported lower revenue for April but beat EPS on impressive opex savings and better margins. However, the company took down full-year guidance by 8% pointing to increasing broad-based macro uncertainty and the Huawei impact. The company highlighted that customers were operating more cautiously in FQ2 but that worsening trends accelerated at the beginning of the FQ3 in conjunction with the Huawei ban. Most companies have been seeing weakness for a while, which was at odds with AVGO maintaining their FY guide last quarter. When taking into account some catch up and some additional conservatism in the 2H, the revision makes more sense and is in line with the flat outlooks we heard in Asia a few weeks back. Net net, the lower FY is a bigger revision than what was expected but we don't believe the sky is falling and we still think the strong capital return story keeps a bottom in the stock, and hopefully the 2H proves conservative should the trade tensions resolve."
Citi- Buy rating, price target to $300 from $320
"Lowers Guidance to Factor in Huawei and $300 Billion Additional Tariffs, Here's the Bottom and it Ain't That Bad. Yesterday after the close, Broadcom reported F2Q19 revenue and earnings below expectations and lowered its F19 guidance due to a combination of the Huawei ban (5% customer) and the threat of additional tariffs. We maintain our Buy rating on AVGO as we believe EPS is close to a bottom and due to valuation as the stock is trading at 14.4X C20E EPS, below its peer average of 21.6X."
J.P. Morgan- Overweight rating, price target to $350 from $365
"Despite the near-term headwinds and lowered full-year revenue outlook, the team anticipates better FY operating margins and still expects $10B of FCF from continuing operations – implying the dividend will rise to $11.75-$12.00 per share in December, or 10-12% growth. We are lowering our CY19 estimates and rolling out our CY20 estimates, where we expect $25 in earnings power. Our price target moves to $350 and we reiterate our OW rating on AVGO. AVGO continues to be our top pick in semis and we would accumulate shares on weakness."
Goldman Sachs- Neutral rating, price target to $290 from $300
"While the surprising cut and uncertain macro/trade outlook will likely keep the stock range-bound in the near-term, and we maintain our Neutral rating on the stock, our constructive view on Broadcom's competitive position across its served markets in Semis, coupled with deflated valuation multiples (i.e. 11x FY20E EPS, 11.5% FY20E FCF yield, 5.3% FY20E dividend yield based on the AH price of $257.70), points to an improving risk/reward profile, in our view."
Baird- Outperform rating, price target to $280 from $300
"Broadcom's reduced full-year revenue guidance is dismissing the 2H recovery thesis articulated by many semiconductor companies earlier this year - ignoring at the time high and still-rising inventories. Broadcom is well positioned in this cyclical downturn, owing to its fabless model, company-specific growth catalysts, revenue diversification, and software revenue stability. Combined with strong cash flow generation and an attractive multiple, we view Broadcom as a defensive, highquality name."
Morgan Stanley- Equal-weight rating, price target to $250 from $262
"We continue to be Equal-weight AVGO, with a negative view on the business near term balanced by the company's industry leading margins. Growing headwinds across Broadcom's key markets (networking, storage, smartphones) finally caught up to them, triggered by the latest negative developments over trade in the past month. A broad-based slowdown and the impact from Huawei are weighing heavily on the 2H outlook, which is further compounded by customer inventory reductions – a dynamic that has kept us Cautious on the Semi industry."
Bank of America- Buy rating, price target to $345 from $370
"Weak 2H outlook could pressure AVGO/peers (SWKS, QRVO, MRVL, XLNX, & other compute peers) and semis in general until we get a China/US trade resolution that can reignite customer confidence. We do assume that any volatile stock market correction could pressure the two sides to come to some kind of resolution. Meanwhile, AVGO's past 10x-18x forward PE range and our $23 FY20E EPS suggest that, at an after-hours price of $258, it is trading towards the lower-end of its $230-$414 theoretical range."