We’ve picked another winner.
Our most successful pick in our Intelligent Income Investor service, Broadcom (AVGO), is up over 500% since we first recommended it in March 2020.
Shares are up 15% this past month alone.
That’s great news if you bought back then. But the recent rally pushed Broadcom shares into overvalued territory and well above our buy-up-to price.
So I wouldn’t recommend buying it now…
But there’s another technology company with a very similar setup to Broadcom that’s about to take off.
This company is pursuing a similar growth path to Broadcom, and I’m very bullish on its future success.
So today, I want to share the strategy that has worked so well for Broadcom. And help you understand why I think this next company is going to follow in Broadcom’s footsteps.
Broadcom’s Massive Success Story
Broadcom entered the public market when it listed on the Nasdaq in 2009 under the name Avago (AVGO).
Back then it was a technology hardware company, developing products like advanced touchscreens for smartphones and optical mouse units for computers.
But soon after, CEO Hock Tan began aggressively pursuing merger and acquisition (M&A) deals with his competitors.
Because of this, Avago grew into Broadcom – a leader in mobile connectivity tech and semiconductors.
It was the perfect business during the global adoption of smartphones.
And less than two years after changing Broadcom’s name, Tan saw a new trend in technology emerging in the mobile device space.
This new trend was cloud storage.
Always wanting to be ahead of the curve, Tan spent $18.9 billion to acquire CA Technologies in 2018.
CA Technologies was a leader in the software-as-a-service (SaaS) space for enterprise IT solutions.
If that sounds like a mouthful, you’re not alone. Even many analysts at the time didn’t understand how important this technology would be later. They questioned Tan’s rationale for buying the company.
They worried this semiconductor company was expanding outside of its circle of competence by moving into the SaaS space.
But as it turned out, Tan was right on the money when it came to predicting the next big thing once again.
Not only did shifting to software reduce the costs of making physical products and shipping them… They could also update software and get ahead of rivals looking to compete.
Since Tan’s acquisition of CA Technologies in 2018…
- Broadcom’s sales have increased 75% from $20.8 billion to $36.5 billion.
- Gross margin has improved from 52% to 68%. (Gross margin is the amount of money a company makes after accounting for the costs of producing the goods/services it sells.)
- And operating margin has improved from 25% to 45%. (Operating margin is the gross margin minus the expenses of overhead costs such as employee wages, lawyer fees, etc.)
This trend is only going to continue as this company continues to grow and evolve. And while this is great for AVGO shareholders… There’s still a chance to profit for those who missed the buying opportunity.
Which leads me to the company that’s following in Broadcom’s footsteps…
The Next Broadcom
As I mentioned above, when Broadcom began its software buying spree, many analysts questioned the moves.
But Broadcom’s recent success clearly proves that an M&A-driven model focused on bleeding-edge technology and meeting consumer demands results in massive profits.
These days, anytime I see all these factors lining up with quality management teams, I get excited.
And that leads me to the company I believe will be the next Broadcom: Cisco (CSCO).
Cisco has been known for its networking hardware for years. At the dawn of the internet era, Cisco was the world’s most valuable company.
But during the last 20 years, Cisco has fallen behind the technological curve.
Today, it’s known as a boring “old tech” stock that has a 3%+ dividend yield.
But like Broadcom several years back, Cisco is starting to make major M&A moves to evolve its business toward another major tech trend.
Cisco recently made its largest acquisition ever, buying Splunk (SPLK) for $28 billion dollars.
Splunk is a large cybersecurity firm. And as everything goes digital, the demand for cybersecurity is only going to increase.
Cybercrime is projected to cost American businesses $320 billion by the end of this year, a 45% increase from last year.
So Cisco’s deal with Splunk will meet massive – and increasing – consumer demand.
Right now, before the deal has officially closed, Cisco shares are trading for just 12x earnings.
For a tech stock, that’s extremely cheap. The S&P 500 is currently trading at 21.5x earnings.
But to put this in perspective with Broadcom…
Guess what Broadcom shares traded for in 2018 prior to its CA Technologies acquisition…
12x earnings.
The same place Cisco is trading now.
Now, there is always execution risk with large-scale M&A deals. But Cisco’s willingness to evolve from solely a hardware-focused company into the cybersecurity business – right at the time consumer demand for it is globally increasing – seems like the perfect setup.
And Cisco’s M&A deal with Splunk could be the first of many…
So now is the perfect time to buy if you want in on the significant upside gains I see ahead.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research