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Reasons Why You Should Get Rid of Broadcom (AVGO) Stock Now

If you are still holding on to shares of Broadcom Limited AVGO in your portfolio, it is time you dump them as chances of favorable returns in the near term appear bleak.

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. One such stock is Broadcom as it has witnessed a significant price decline in the past one year and negative earnings estimate revisions for the current quarter and the year. Further, the company’s Zacks Rank #4 (Sell) only reflects its innate weakness.

Notably, the stock has returned just 6.3% in a year’s time, substantially underperforming the 10.6% rally of its industry.

Let’s delve deeper and find out what is taking this company down.

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Why Broadcom Should be Avoided

Broadcom operates in a highly competitive market. The company faces significant competition in most of its operating markets that negatively impacts top-line growth. Pricing pressure also keeps margin under pressure. In the FBAR technology market, the company faces significant competition from Skyworks surface acoustic wave (“SAW”) filters. Well-established companies like Cavium and Intel INTC are its competitors in the wired infrastructure market. We expect intensifying competition to keep profitability under pressure at least in the near-term.

Broadcom’s frequent acquisitions have escalated integration risks. Moreover, we note that the large acquisitions negatively impacted its balance sheet in the form of high level of goodwill and intangible assets, which totaled $39.3 billion or almost 71.5% of total assets as of May 6, 2018.

Buyouts have also negatively impacted Broadcom’s balance sheet, as high indebtedness adds to the risk of investing in the company. As of May 6, 2018, the company had total debt of $17.59 billion.

For the full year 2018, we have seen 12 estimates moving south in the past 60 days. This trend has caused the consensus estimate to trend downward from $19.84 per share to its current level of $19.47.

Additionally, for the current quarter, Broadcom has seen 10 downward estimate revisions, dragging the consensus estimate down to $4.60 per share from $4.75 per share in the past 60 days.

Further a significant portion of Broadcom’s revenue comes from a handful of customers including Foxconn, which accounted for 14% of net revenues in fiscal 2017. Top five direct customers accounted for 40% of the company’s top-line in fiscal 2017 as compared with 30% reported in fiscal 2017. Loss of any of these top five customers can significantly hurt top-line growth. Apple (including sales to the contract manufacturer) contributed more than 20% of revenues in fiscal 2016. The exposure has increased considerably from the past year (15% in fiscal 2016) and it has not been enough to boost pricing power that continues to hurt margins.

Moreover, due to the significant exposure, Broadcom’s share price movement depends heavily on Apple’s results (primarily on iPhone’s performance), which doesn’t bode well for the investors.

So, it may not be a good decision to retain this stock in your portfolio anymore, at least if you don’t intend to wait for a long time.

Key Picks

Amazon.com, Inc. AMZN and NVIDIA Corporation NVDA are stocks worth considering in the broader technology sector. Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Amazon and NVIDIA is currently pegged at 30.2% and 10.3%, respectively.

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