Investors who followed this share tip have made a handsome profit, but what now? Our overseas investing expert explains what he’d do.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
Few shares have rebounded as far as those of Broadcom (NASDAQ:AVGO) over the past 15 months, yet the yield is still attractive and there could be more to come. The company looks as good an investment as other comparable operators in the sector.
Broadcom has a diverse range of products including semiconductors and software used in data centres, networking and the storage of information. The Avago side of the business focusses on radio frequency filters and amplifiers.
The group has a wide range of markets including smartphones such as Apple iPhone and Samsung Galaxy, plus wired communication systems. Its chips handle broadband and can be found in television set-top boxes and security systems.
These are growing markets, ones that are always looking to introduce new products that provide faster and more secure services. It is hard to see Broadcom failing to continue its expansion.
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Following the pandemic, the semiconductor market has found itself in an unreal situation. Major markets such as vehicles and consumer electronics have bounced back after months in the doldrums, creating a temporary shortage as chip makers race to catch up with demand. In addition, lockdowns have speeded up the transformation of the workplace into digital systems, while the rollout of 5G phone networks and the development of electric vehicles provide further boosts to demand.
Source: interactive investor. Past performance is not a guide to future performance
Chip production has also been affected by the trade war between the US and China and by a shift in production from the US to Asia, leading to longer delivery times.
The time lag between ordering semiconductors and taking delivery is still getting longer and is reported to have reached 18 weeks on average, with delays of up to six months in some industries.
Experts generally believe that the shortages will not bottom out until the second half of this year at the earliest, and that the situation will not stablise for a couple of years, giving continued strong growth of at least 5% a year. American companies, which dominate the design of, and sales of, chips will be the main beneficiaries.
Intel (NASDAQ:INTC), the world’s largest chipmaker, has promised to step up US production capacity and to open its factories to other chipmakers.
Broadcom chief executive Hock Tan has sought to play down expectations, saying chip production is a mature industry, but the company’s 15% increase in sales in the first quarter of 2021 suggest otherwise. The spread of the Internet of Things should play well for Broadcom.
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There has been some concern that Broadcom would be hurt by rival Nvidia (NASDAQ:NVDA) using its proposed takeover of chip maker Arm to restrict the use of Arm’s technology and raise prices. Broadcom’s chief executive Hock Tan has allayed these fears by actually supporting Nvidia’s acquisition of Arm, saying that assurances have been given that Nvidia will invest in Arm’s technology and keep its products available for all companies to use.
Broadcom sunk below $200 in March 2020 but has since recovered to a peak of $490 in February this year. At the current level around $477, the share price has already factored in continued sales growth. However, the company is unlikely to disappoint shareholders and the yield of nearly 3% offers considerable comfort.
Hobson’s choice: I picked Broadcom as one of the five best US stocks to put in an ISA in March 2019 at under $300, so those who took the opportunity are up more than 60%, including dividends. The case to buy now is less clear cut and more cautious investors may prefer to see if the shares fall back, but the downside looks limited. Consider buying up to $480.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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