Broadcom: We Raise Our Expectations and Upgrade Moat to Wide, but Shares Still Out of Reach

We are upgrading Broadcom’s AVGO economic moat rating to wide from narrow, based on improved confidence in the durability of Broadcom’s technological lead in smartphone and networking chips and our favorable opinion of the firm as an aggregator that can be more valuable than the sum of its parts. Thanks to a longer runway for economic profits, as well as stronger near-term growth and long-term margin assumptions, we raise our fair value estimate for Broadcom to $790 per share from $640. We also raise our Capital Allocation Rating to Exemplary to reflect our view of the firm’s terrific investment record, while maintaining a Medium Uncertainty Rating. Despite our higher fair value estimate, we still view shares as overvalued.

We believe Broadcom is a terrific aggregator of smaller firms. Its ability to acquire and streamline generates strong profits and cash flow, fuels its robust dividend, and informs our wide economic moat rating. We laud the firm for its execution and operating efficiency, which build upon its large organic and inorganic investments and help it to outperform its end markets organically.

In our view, Broadcom’s networking and wireless chip businesses are its strongest and contribute heavily to the firm’s moat. We anticipate the company will maintain a technological lead in thin-film bulk acoustic resonator filters, which it sells exclusively into Apple’s iPhone. We also expect it to maintain product leadership in merchant silicon for switching and routing applications and to defend its strong relationships with heavyweight equipment vendors Cisco Systems and Arista Networks.

Broadcom’s software largely focuses on relative market niches like mainframe programs and enterprise software development, but we see its offerings as highly competitive. Broadcom’s focus on strategic large software customers like financial institutions and governments—where it is deeply embedded—elicits steep switching costs.