Trade Of The Week

Broadcom (AVGO) Bulls Pile Up as Shares Consolidate

Date: October 18, 2017

Broadcom (AVGO) shares have been consolidating on the weekly timeframe since late May, a highly-coiled name in a strong trend with massive bullish open interest. AVGO has a potentially explosive move out of this range up to $290-$300. AVGO has recently seen big buyers in the December $270 calls, over 13,000X, as well as the January $280 calls with more than 9,000 bought and November $260 calls with 13,000+ bought. AVGO has large put sales and call buys across every month in expiration and full look at the $1M+ positions from the OptionsHawk database is below.

 

The $99.86B semiconductor trades 13.85X earnings, 5.9X sales, and 18.3X cash with a 1.67% yield and double-digit earnings growth. AVGO is targeting high-single digit revenue growth in 2018 and 2019 and continues to benefit from overall growth trends in the industry with SIA recently noting the thirteenth consecutive month of global semiconductor growth. Last week, Gartner raised their FY semiconductor forecast for the fifth time to 19.7% Y/Y. AVGO reported sales growth across all their business segments last quarter with their lower-growth but more stable wired business up 7%, wireless up 27% with more tailwinds from the new Apple iPhone cycle, and industrial rising 18%. AVGO reached a deal to broaden their storage business last year with a $5.9B deal for Brocade which has faced numerous delays but expected to close this Fall.

 

Analysts have an average target for shares of $278 with most the Street at a Buy equivalent and short interest minimal at 1.2%. JPM positive on 9/12 noting that their recent checks showed a 40% increase in blended content for the new models of iPhone and concerns about production issues or lackluster demand are overblown. Canaccord has a $300 PT seeing a Super Cycle in upgrades with pent-up demand. They think 250M units sold in calendar 2018 is possible which will be a big tailwind to AVGO. Bernstein was positive on 10/10 noting that the company is growing organically by mid-double digits, faster than the overall industry and the focus on M&A has overshadowed a very strong business. They have a $285 PT for shares.

 

Events to Watch: Earnings Expected Around 12/7, Broadband World Forum (10/24), Brocade/Broadcom Merger Close Deadline (11/1)

 

Trade to Consider: Long the AVGO December $270 Calls for $3.50 or Better

 

 

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