Broadcom Stock: To Sell or Not to Sell After VMware Acquisition?

Broadcom (AVGO -2.12%) has been a standout investment in the technology sector, with shares climbing over 2,500% in a decade, far outpacing the average returns of the semiconductor industry. This rise can be attributed not only to the company's solid performance in artificial intelligence but also to the savvy acquisitions under CEO Hock Tan, including the notable purchase of VMware. Despite this success, investors might now be wondering whether it's time to take profits or keep holding onto Broadcom stock.

Broadcom's Steady Performance Despite Industry Headwinds

The semiconductor industry has faced considerable challenges recently. Many segments, from smartphones to industrial automation, have experienced downturns. Broadcom, however, has managed to maintain growth thanks to its diverse technology portfolio and significant inroads into enterprise software after its VMware acquisition.

For fiscal Q1 2024 ending January 2024, the company saw a modest 4% year-over-year increase in semiconductor sales. Additionally, the inclusion of VMware contributed to a notable uptick in software segment revenue, signifying the acquisition's immediate impact. According to Broadcom's financial reports, networking which includes AI and computing offload, had a significant 46% growth, while other segments had mixed results.

Financial Health: Free Cash Flow and Debt

One of Broadcom's strengths has been its remarkable free cash flow (FCF) margins, often nearing or exceeding 50%. However, the recent VMware deal caused a temporary dip in FCF margins to 39%. Management is optimistic that these margins will improve as they integrate VMware's operations fully, increasing profitability.

On the balance sheet, Broadcom holds substantial debts, with the figures listed as $11.9 billion in cash against $73.5 billion in debt, partially balanced by ongoing debt payment efforts. While the stock trades at a 30 times premium on the trailing 12-month free cash flow, it might be seen as expensive for a company with considerable debt. Nevertheless, an increasing revenue trend and potential margin expansion can paint a different picture for long-term investors who might view this as a temporary phase in Broadcom's growth trajectory.

In summary, although Broadcom trades at a high multiple, the company's performance and future outlook do not immediately suggest a sell. For long-term investors who have witnessed the company's impressive growth and are confident in its strategic direction, Broadcom continues to be a solid holding in the technology sector.

Broadcom, VMware, Stock