Broadcom Gets Another Downgrade From Goldman Sachs

Nearly a week after Broadcom Inc AVGO stock crashed following the announcement of a puzzling $18.9 billion buyout of CA, Inc. CA, Broadcom is still getting hate from Wall Street.

The Analyst

Goldman Sachs analyst Toshiya Hari downgraded Broadcom stock from Buy to Neutral and cut his price target from $300 to $220.

The Thesis

Like most other analysts who have weighed in on the deal, Hari says CA’s software business is outside of Broadcom’s core competency, and the buyout has created uncertainty about Broadcom management’s long-term strategic vision.

“Importantly, we believe management will need to provide greater clarity on its forward strategy and that it will take time for management to gain investors’ confidence in their ability to achieve their goals,” Hari said in a note.

Hari says Broadcom will need to answer a number of important questions in coming months, including whether or not the company is transitioning to a software company, whether its position in the semiconductor market is in jeopardy and whether or not investors should expect additional software buyouts in the future.

While Hari says the CA deal will add up to 9 percent to Broadcom’s earnings, the potential benefits for the stock have been outweighed by the negative impact of the uncertainty the deal has created.

Prior to the deal’s announcement, Hari was forecasting Broadcom stock’s earnings multiple would expand from around 11 to 15, boosted by the company’s aggressive capital return plan. Now, he's expecting the stock to stay in the 11 PE range until the company can clearly demonstrate its intended path forward.

Price Action

Broadcom stock traded higher by less than 1 percent Wednesday at $209.63.

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