In a move that surprised some investors and analysts, Apple (AAPL 0.67%) signed a new multi-billion agreement with Broadcom (AVGO 7.25%), which will drive the development of components related to 5G radio frequencies. The announcement sent Broadcom stock higher as the relationship between the two companies developed.
Of course, this semiconductor stock was already up before the announcement, so the added news now has the stock trading at record highs. Given its already high stock price, does this latest transaction make Broadcom a buy, or have investors missed their opportunity?
The Apple-Broadcom deal
Broadcom’s chip segment develops semiconductors for other companies. It invests billions a year in research and development, and it employs engineers close to its major customers to develop solutions collaboratively. A fan of his approach is Apple, which was a major Broadcom customer before this deal. Broadcom designs the chips that power the Wi-Fi hotspot for the iPhone and other products, and that relationship accounted for about 20% of Broadcom’s revenue in 2022.
Much remains unknown about the new deal. Neither company disclosed financial terms, although Apple said the deal was part of a 2021 commitment to invest $430 billion in the US economy.
Additionally, Apple recently developed more chips in-house and wanted to develop its own Wi-Fi and Bluetooth chips, according to a Bloomberg report. Until recently, this raised fears that Apple was downgrading its relationship with Broadcom. Therefore, investors likely took this perceived turnaround as a surprise.
Broadcom stock status
As mentioned earlier, investors expressed surprise at the deal by bidding Broadcom shares at record highs. As a result, Broadcom’s stock price has risen more than 25% over the past 12 months.
And even after shrinking for most of 2022, revenues and profits continue to rise. In the first quarter of fiscal 2023 (ended Jan. 29), revenue of $8.9 billion was up 12% year-over-year, primarily driven by a 17% increase in product sales .
During this period, he limited revenue cost increases and reduced operating expenses. That helped it report quarterly net profit of $3.8 billion, up 57% from the same quarter in fiscal 2022.
Surprisingly, its stock price rally hasn’t made Broadcom an expensive stock, as it sells at a P/E of 23. This multiple is above multi-year lows, but it still trades at a valuation lower than that of Apple, NvidiaAnd Advanced micro-systems. Additionally, Broadcom remains one of the most lucrative dividend-paying stocks in the semiconductor industry. At $18.40 per share per year, it claims a dividend yield of around 2.5%, well above the 1.6% average for the S&P500.
Moreover, this payout has increased every year since 2011, with the dividend increasing by 12% after the most recent increase. This cash return provided stability amid the stock’s considerable growth. And since the company’s quarterly free cash flow of $3.9 billion far exceeded the cost of the $1.9 billion dividend for the period, its payout should remain secure.
Should I consider Broadcom?
Despite a multi-billion deal with Apple, it’s not too late to buy Broadcom stock. Granted, most investors would probably like more details on the terms of this specific deal.
However, Broadcom posted solid growth in the first quarter of the fiscal year before the deal. Due to its P/E ratio of 23 and a high dividend, the stock appears undervalued. And with the company strengthening its relationship with Apple, Broadcom stock will likely continue to rise over time.
Will Healy holds positions in Advanced Micro Devices. The Motley Fool holds positions and recommends Advanced Micro Devices, Apple and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
