The establishment of American multinational computer technology company Broadcom was a result of various business decisions that started in 1961 with the creation of the semiconductor product division of Hewlett-Packard called HP Associates, its separation in 1999 as part of the Agilent Technologies spinoff, the acquisition of the semiconductor business of Agilent Technologies by investment companies Kohlberg Kravis Roberts & Co. and Silver Lake Partners in 2005 and the subsequent creation of Avago Technologies, the acquisition of Broadcom Corporation by Avago Technologies in 2015, and the resulting rebranding to Broadcom in 2016.

Broadcom has also ventured into infrastructure software products beginning in 2018 after the acquisition of American enterprise software developer CA Technologies and the enterprise security business of consumer software developer Symantec Corporation. The company was also named one of the best-performing stocks in the United States stock market in the 2010s due to its total returns of 1956 percent. Nevertheless, through this series of evolution in its business history, it now represents and banks on the expertise and technologies that were developed during its long tenure. This article discusses the advantages and disadvantages of Broadcom stock.

Investing in Broadcom: Weighing the Advantages and Disadvantages of Broadcom Stock

Pros: Broadcom Stock Advantages

Broadcom trades in the Nasdaq Stock Market under the ticker AVGO. It is also part of the Nasdaq 100 component and both the S&P 100 and S&P 500 components. The company might not be a household name unlike consumer-oriented semiconductor companies like Advanced Micro Devices or AMD, Intel Corporation, Nvidia, and Qualcomm but it has an established and demonstrated expertise in the semiconductor business that caters to enterprise customers. The expansion to enterprise software has also introduced another avenue for further growth. The following are the advantages of investing in Broadcom stock:

• Semiconductor Business Capabilities: The company can be considered a well-rounded semiconductor company that designs, develops, manufactures, and supplies a wide range of semiconductor products to enterprise customers. It produces chips and other components used in data centers or mainframes, network infrastructures, broadband and wireless communication components, energy systems, and data storage.

• Enterprise Software Business Venture: More than 70 percent of its revenues still come from its semiconductor business. However, because of its expanding expertise in enterprise software development through its more recent and future acquisitions, it has the potential to expand its enterprise software business. The market for enterprise software is huge and has an annual compound annual growth rate of 9.50 percent.

• Strong and Consistent Financial Health: The company has a healthy financial position with robust free cash flow generation due to its strong leadership position in several market segments. This strong cash flow allows it to invest in research and development, strategic acquisitions, and other expansion pursuits. The same cash flow also allows the company to return value to its stockholders either through dividends or stock buybacks.

• Large-Cap Stock With Growth Potential: Broadcom has a market cap of more than $790 billion. However, despite being considered a large-cap stock, it still has the potential to be considered a growth stock because of its 10-for-1 stock split announcement that takes effect on 15 July 2024. This decision was made to boost the liquidity of its shares by making its stock price more affordable and accessible to investors and traders.

• Dividend Payout History and Growth: Another reason to invest in Broadcom is that it is a dividend stock with a strong history and growth. Dividend payments per share from 2013 to 2023 were at 35.28 percent. It has a long history of releasing dividends to its shareholders and has consistently increased its payouts for 12 consecutive years. Investing in Broadcom stock is ideal for building or expanding an income-generating portfolio.

Cons: Broadcom Stock Disadvantages

The entire semiconductor industry is vulnerable to economic factors and specific supply chain issues. Broadcom is also specifically at risk of losing revenues due to its dependence on a smaller pool of customers. The company also competes with different semiconductor companies across different market segments. These include traditionally consumer-oriented companies like AMD, Intel Corporation, and Qualcomm as well as enterprise-oriented companies like Analog Devices, Cisco Systems, Micron Technologies, Skyworks Solutions, and Texas Instruments. The following are the disadvantages of investing in Broadcom stock:

• Dependence On Few Business Accounts: Remember that more than 70 percent of its revenues come from its semiconductor business. The company is also dependent on a small number of major business customers. This makes it vulnerable to fluctuations in demand from these key accounts. Take note that the company lost hundreds of millions in revenue after the United States restricted business dealings with Huawei in 2019.

• Specific Risk From Supply Chain Issues: Semiconductor companies have grappled with different instances of supply chain issues in the most recent years. These include logistics problems and actual shortages of input materials. The global operations of Broadcom also expose it to problems like trade disputes, regulatory changes, and geopolitical conflicts. Its bargaining power against suppliers is also being challenged by its competitors.

• Debt Reliance and Increasing Debt Levels: It is true that the company has a healthy cash flow but it also utilizes debt to raise capital for its strategic acquisitions. An increase in debt levels increases the cost of servicing debts due to an increase in interest expense. This can eat into the profits of the company. Broadcom still has a healthy financial position but medium-to-long-term investors should regularly take note of its debt levels.

• Fundamental Cyclical Stock Disadvantages: Another disadvantage of Broadcom stock is that it is more of a cyclical stock than a defensive stock despite its enterprise-focused business model. It is vulnerable to the boom and bust cycle in the economy and other causes of economic downturn. Take note that spending on technology tends to decrease during a particular downturn. This negatively impacts the sales across its products.

• Long-Term Impact of Intense Competition: The entire semiconductor industry is driven by innovation, and competition fuels companies to innovate. Broadcom needs to innovate to protect and expand its market share. However, because it requires huge investments, it can also put pressure on its finances and impact its profitability. This is an inevitable offshoot since the company operates in a highly competitive environment.