The Ratings Game: Broadcom stock declines as wireless chip stance confuses some analysts

Broadcom Inc. shares slid Friday after half the analysts covering the chip maker raised their price targets but expressed concern about the company downplaying its wireless assets ahead of next year’s anticipated release of 5G technology.

Broadcom AVGO, -3.78%  shares fell 3.8% to close at $315.42, after touching an intraday low of $310.62, while the S&P 500 index SPX, +0.01% finished virtually flat, the tech-heavy Nasdaq Composite Index COMP, +0.20%  advanced 0.2%, and the PHLX Semiconductor Index SOX, -0.60% declined 0.6%.

Of the analysts who cover Broadcom, 21 have buy or overweight ratings, while 12 have hold ratings. Of those 33 analysts, 16 analysts hiked price targets to an average $346.21, up from a previous $329.63, according to FactSet data.

Analysts, however, appeared concerned with Broadcom’s shifting stance on wireless chips, terming them a non-core business, while playing up gains in its software business.

“We remain positive on the company’s core networking business, but deviating strategic focus towards low-growth software assets, and away from previously core wireless leaves us admittedly confused on the shifting core tenants,” said Cowen analyst Matthew Ramsay, who has a market perform rating and raised his price target to $310 from $285.

Susquehanna Financial analyst Christopher Rolland, who has a positive rating on Broadcom, was also taken aback by the new designation of wireless products.

Rolland said “we were somewhat shocked by the new distinction between core and non-core businesses and that wireless was considered non-core.”

“We think this purposeful distinction may lead some to conclude Broadcom is interested in divesting their WiFi, industrial, or even RF businesses,” Rolland said.

Meanwhile, Rolland hiked his price target on Synaptics Inc. SYNA, +7.85%  to $60 from $46 based on Broadcom’s disclosure that revenue from its mixed signal custom product line was expected to drop to less than $500 million in fiscal 2020 from about $1.1 billion in fiscal 2019, “driven by a change in architecture at our primary smartphone customer.”

“While this could mean wireless charging, we think it is more likely the touch controller,” Rolland said. “It is well rumored Apple AAPL, +1.36%  is attempting to move to flexible OLED displays in next-gen iPhones. This ties in well with Synaptics’ commentary about a recent win at Huawei (that we believe utilizes this OLED technology) and the challenges the company were uniquely able to address with their latest touch controllers.”

Patrick Moorhead, principal analyst at Moor Insights, summed up his take in a tweet:

Broadcom said in its earnings report Thursday afternoon it expects fiscal 2020 revenue of $24.5 billion to $25.5 billion. That outlook signals a growing optimism that 2020 will be a better year for the chip sector than 2019, which suffered in comparison to 2018 when chip sales reached record levels globally.

Initially, analysts surveyed by FactSet had forecast on revenue of $23.9 billion, and on Friday that consensus crept up to $24.74 billion.

About $7 billion of that is expected to come from software from the company’s acquisitions of Symantec’s enterprise security business, CA Inc. back in 2018, and Brocade Communications Systems Inc. for $5.5 billion in late 2017. For fiscal 2019, Broadcom reported revenue of $22.6 billion, up from $20.85 billion in fiscal 2018.

For the year, Broadcom’s stock is up nearly 24%, compared with a 26% advance on the S&P 500, a 32% rise in the Nasdaq, and a 56% rally in the SOX index.

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