Broadcom Is Baird's New Top Large-Cap Semi Pick

Broadcom Inc AVGO reported 13-percent year-over-year third-quarter revenue growth and a 21-percent increase in non-GAAP earnings per share on Thursday. The revenue was roughly in line with estimates, while the bottom line exceeded expectations.

The company issued in-line revenue and gross margin guidance for the fiscal fourth quarter.

The Analyst

Baird analyst Tristan Gerra reiterated an Outperform rating on Broadcom and increased the price target from $290 to $300.

Gera named Broadcom as Baird's top large-cap semiconductor idea.

The Thesis

An attractive valuation; secular growth trends in RF, which is likely to return to double-digit growth in 2020 due to 5G; anticipated share gains; a new Wi-Fi cycle; deep learning ASICs; storage; and other secular growth driver make Broadcom top large-cap semiconductor idea, Gerra said in a Friday note. (See the analyst's track record here.) 

Broadcom is a particularly attractive value stock compared to more cyclical semi names, even as the sector adjusts to mid-single digit year-over-year growth into 2019, the analyst said. 

Broadcom's acquisition of CA, Inc. CA should add up to 20 percent to EPS, Gerra said — a figure the analyst said is not included in Baird's current estimates. Broadcom sees strong cross-selling synergies with CA's large enterprise customers, he said. 

Broadcom expects ongoing expansion in gross margins for existing products, and operating margin growth as the gross margin ramp outruns R&D spending, according to Baird. 

The Price Action

Shares of Broadcom have lost about 15 percent year-to-date. The stock was rallying 8.3 percent to $233.90 at the time of publication Friday. 

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