5G Chip Stock Seems to Be a Worthy, Long-Term Investment

Broadcom Inc. (NASDAQ:AVGO) shares have soared 90% since Capital Ideas wrote about the company 18 months ago

Capital Ideas Media | January 28, 2022 | SmallCapPower: Recently, we wrote about how much we love the investment prospects related to 5G.

5G wireless technology has download speeds up to 20 times faster than the current 4G technology. 5G also supports 10 times more devices per square kilometre. In addition, the partnership between 5G and the Internet of Things (IoT), which is a network of Internet-connected devices that collect and exchange data, could bring about a surge in smart technology.

(Originally published on Capital Ideas Media on July 28, 2020)

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[Editor’s Note: Shares of Broadcom have soared 90% since Capital Ideas wrote about the company 18 months ago.]

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Some examples of this: 5G would allow self-driving vehicles to make split-second decisions, presumably making them safer on the roads. Also, these ‘smarter’ vehicles would be able to connect to buildings, street lights, and other vehicles, potentially improving traffic flow.

And in manufacturing, analytics and advanced robotics in ‘smart’ factories could streamline manufacturing processes, leading to efficiency gains and cost savings.

For investors, the current global market for 5G is valued at an estimated $5.5 billion in 2020. That figure is expected to grow to $668 billion by 2026, a compound annual growth rate of 122% according to Allied Market Research.

One company expected to continue to benefit from increased 5G spending is semiconductor giant Broadcom Inc. (NASDAQ:AVGO).

Broadcom has been building a diversified portfolio to serve the growing technological trends of 5G, data centers, and automation, with an increasing move into software with the acquisitions of CA Technologies and Symantec during the past two years.

Broadcom beat analyst expectations with its second-quarter 2020 revenue that rose 4% year over year to US$5.74 billion, which included a 21% increase in software revenue.

What we like most about this stock is its more than 4% dividend yield [It’s now about 3%]. Given that AVGO is expensive by many valuation metrics, investors will get paid to wait should its share price fail to outperform in the short-to-medium term.

The biggest knock on this company is its $46 billion debt as a result of its acquisition spree. To service that obligation, Broadcom did generate $3.1 billion in free cash flow during Q2, easily covering the $1.3 billion dividend payout.

And, while Intel’s more than 16% stock-price drop on Friday was sobering to most semiconductor investors, Broadcom, which is a significant manufacturer of 5G wireless chips and other accessories for next-generation smartphones, should benefit from a steady increase in demand for its wireless solutions (About 75% of AVGO’s sales are derived from smartphones).

Broadcom is also a manufacturer of access and connectivity chips used in enterprise data centers, and should receive a boost by increased cloud spending by businesses, which has accelerated due to COVID-19.

Credit Suisse reinstated coverage of Broadcom at the time, citing AVGO’s “solid core franchise” in broadband, industrial and storage products, in addition to its strong positioning in both semiconductors and software.

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