Like the rest of the stock market, Broadcom (AVGO) was hit hard by the stock market sell-off. The two-day crash that followed President Donald Trump’s tariffs announcement pushed Broadcom stock down 15%. It’s now down more than 37% from its peak in December.
However, management gave the stock announced a new stock buyback program, authorizing a share repurchase of $10 billion through the end of the year.
CEO Hock Tan said the repurchase move showed the board’s “confidence in the strength of Broadcom’s diversified semiconductor and infrastructure software product franchises,” adding, “We are uniquely positioned in mission critical infrastructure software and enabling hyperscalers to drive innovation in generative AI.”
Why the buyback is meaningful
Broadcom’s buyback announcement comes just days after the Trump administration rocked the market with 10% tariffs globally (as well as what it called “reciprocal” tariffs on dozens of individual countries). The new import taxes helped push the Nasdaq Composite into a bear market. They also present a massive obstacle for businesses around the world that now must figure out how to handle the new tariff regime. Their responses could include absorbing the additional costs, passing them along to customers, moving production to the U.S. or a lower-tariffed country, or coming up with another creative solution.
The specific implications for Broadcom, and its semiconductor peers aren’t fully clear. For now, Trump’s tariffs exempt direct chip imports, meaning imports of individual chips, while chips that are already packaged into electronics and then imported will be subject to tariffs.
Even if Broadcom isn’t directly subject to tariffs, its business is still sensitive to the economy, as the semiconductor sector is cyclical, and a trade war could plunge the world into a recession, which explains the broad sell-off in the tech sector.
Broadcom’s manufacturing is diversified both internally and outsourced to several partners, including Taiwan Semiconductor Manufacturing (TSMC) and others. It does handle some specialized manufacturing in the U.S., but the majority of its components come from abroad.
Despite the exposure, the company’s buyback announcement shows confidence in the business and courage to face the long-term impact of tariffs, knowing that it can handle them.
Like its peers, Broadcom could see an impact from the tariffs, but it’s in a strong financial position with $19.4 billion in free cash flow in fiscal 2024. Although its balance sheet is heavy on debt and relatively low on tangible assets like cash, the company’s diversified business model and growth in artificial intelligence (AI) should ensure it continues to generate a healthy amount of cash flow.
Of course, Broadcom doesn’t have to spend $10 billion on buybacks by the end of the year, but the announcement also shows the company is keen to take advantage of its beaten-down stock price, which is usually a smart move. With its market cap above $700 billion, the buyback would only reduce shares outstanding by about 1.5%, however.
As you can see from the chart below, the company has a history of buybacks, though its share count has continued to rise due to share-based compensation and its acquisition of VMWare in late 2023, which significantly diluted the stock.
Is Broadcom a buy?
Broadcom stock has fallen sharply in recent weeks even as the stock popped on its fiscal first-quarter earnings report as the company delivered impressive results.
Revenue in the quarter was up 25% to $14.9 billion on 77% growth in AI revenue to $4.1 billion. Its performance on the bottom line was strong as well, with adjusted earnings per share up from $1.10 to $1.60.
Looking ahead, Broadcom looks like a good bet regardless of whether it executes the buyback or not as its diversification, strength in networking infrastructure, and opportunity in AI make it well-positioned for growth over the long term even if tariffs slow it down in the near term.
With the stock still down close to 40% from its peak, investors may want to take the hint from Broadcom and buy the stock as well.
— Jeremy Bowman
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Source: The Motley Fool
