Broadcom

A high-growth driver of innovation

As I already mentioned a few weeks ago in my article on the medical technology company Medtronic, I'm a big fan of investing in stocks that benefit from megatrends. Besides demographics, today I want to address the ongoing trend toward more digitalization. This isn't purely about the innovative technologies awaiting us in the coming years and decades - digital transformation is much more about connecting people and machines in all areas of life. And for exactly this connectivity, powerful microprocessors, such as those from Broadcom, are necessary.

No matter what device you're reading this article on, the probability that no Broadcom technology is involved is vanishingly small. The technology of the sixth-largest semiconductor group is in smartphones, computers, Wi-Fi routers, the cloud, game consoles, new cars and many, many more. Reason enough to take a closer look at the company.

At this point, once again a big thank-you to Christopher for the suggestion.

The history and business model of Broadcom Inc.

The semiconductor giant Broadcom Inc. as we know it today came about through a series of smart business combinations. For a better understanding, I'd therefore like to roughly summarize the individual origin stories. Let's start in 1939, when the two Stanford graduates William Hewlett and David Packard teamed up to found the Hewlett-Packard Company with a meager starting capital of $538. In their small garage in Palo Alto (California), which by the way is considered the birthplace of Silicon Valley, they initially devoted themselves to manufacturing electronic test and measurement equipment. Their first marketable product was an audio oscillator called the HP200A. It didn't take long before the Walt Disney Company noticed this device, bought eight audio oscillators and used them in the production of its animated films. Thanks to that and also to military contracts during World War II, HP was able to grow quickly.

In 1961 Avago was founded as a subsidiary of HP, focusing on optoelectronics. As part of a restructuring in 1999, HP spun off several business divisions under the name Agilent - including Avago. In 2005 a private equity group acquired Avago Technologies and finally took the semiconductor company public in 2009. From 2013 onward, a series of smart acquisitions followed. For example, it expanded its fiber optics business for 400 million US dollars by taking over CyOptics. That same year it bought the LSI Corporation for 6.6 billion US dollars to better position itself in the microprocessor and memory chip segments. In May 2015 it finally announced that it would take over its long-time competitor, the Broadcom Corporation, for the hefty sum of 37 billion US dollars. But one thing at a time ...

The origins of Broadcom go back to September 20, 1954, when Henry Samueli was born in Buffalo (New York). His parents were Jewish-Polish immigrants who arrived in America with empty pockets but were grateful to have escaped the Nazis. Later the family moved to Los Angeles to open a liquor store there. Henry, who was fascinated by electronics as a little boy and built a radio all by himself, attended the UCLA School of Engineering, where he both wrote his bachelor's thesis and, after earning his doctorate, worked as a professor himself. Soon afterwards he met Henry Nicholas, whose doctoral advisor he eventually became. Together with him, Samueli decided in 1991 to found the Broadcom Corporation. Both invested $5,000, which they used to buy the necessary equipment, and they began producing integrated circuits for the up-and-coming communications market. Business developed excellently and the company was able to grow rapidly. In 1998 they took the company public and used the fresh capital to buy up smaller semiconductor companies. As already mentioned, the takeover by the Singapore-based competitor Avago Technologies took place in 2015. When the acquisition was completed in January 2016, the company was renamed Broadcom Ltd., and in 2017, with the move of its headquarters to the USA, Broadcom Inc.. Today it is a world-leading company in infrastructure technology, focusing on connecting different devices, the Internet of Things and 5G technology.

How can Broadcom develop in the future?

First, I'd like to take a look at the figures for the most recently published quarter (Q1 2021 - ended 01/31/2021). Total revenue in this period was 6.65 billion US dollars, an increase of 14 percent over the prior-year quarter. Net income amounted to 1.3 billion US dollars, or 3.05 USD per share. Compared with the 385 million US dollars from the prior-year quarter, that was an extremely decent increase. CEO and President Hock Tan also stated that this growth reflects the important role the company plays in this environment of rapid digital transformation. The semiconductor business, which accounted for about 74 percent of total revenue in the first quarter of 2021, generated 4.9 billion US dollars - a whopping 17 percent more than the year before. The smaller infrastructure software division also grew by 5 percent, bringing in 1.74 billion US dollars. Last but not least, the company also commented on the outlook for the second quarter. Here it expects revenue of around 6.5 billion US dollars, likewise an increase of 13 percent over the prior-year period.

As I said, Broadcom is currently the sixth-largest semiconductor company and a key driver of the digitalization of our world. Whether you turn on the navigation system in your car or listen to music through your AirPods, Broadcom technology is built into almost every device that has internet access or communicates with other devices via radio frequencies. Broadcom is also the absolute pioneer of 5G technology, whose infrastructure will be expanded worldwide in the coming years. Together with partner Samsung, it only recently introduced the latest technology, Wi-Fi 6E, which will be even more battery-friendly and powerful.

Broadcom does have a strong and future-proof product range, but it's also a fact that it faces very strong competition that likewise wants a bigger piece of the pie. The company Qualcomm, which by the way Broadcom wanted to buy in 2017 for a record sum of 117 billion US dollars, is one of the biggest competitors. Back then Donald Trump blocked the acquisition because Broadcom was still domiciled in Singapore at the time and he didn't want any more American companies to move away. On the other hand, it's probably exactly this competitive pressure that's responsible for Broadcom being so focused on the future and wanting to drive many more innovations. Without a doubt, it will be able to benefit greatly from digitalization in the coming years.

What about the dividend?

As was the case with quite a few technology companies, Broadcom also took its time with the dividend. Only toward the end of 2010 did shareholders of the semiconductor group receive a share of the company's profits in the form of dividends for the first time. Since then, though, it has managed to raise the payout year after year, and at a more than decent pace. Since looking at the dividend growth rate over the last 10 years makes little sense here, let's look at the rate over the last 5 years. It stands at an incredible 58.3 percent. Admittedly, though, I can't for the life of me imagine these growth rates continuing like this in the future. The current dividend yield is a strong 3.1 percent, but the payout ratio is a far too high 159 percent. So you should definitely keep a close eye on that figure.

Conclusion:
Over the years, the semiconductor giant Broadcom has built up a very solid, innovative and high-growth product range. I'm very optimistic about the company's future and would recommend that long-term-oriented investors take a closer look at Broadcom.