Broadcom Stock to be Hurt by Apple’s Departure?

Apple has a history of severing ties with chipmakers. For example, in 2020, it replaced Intel processors in MacBook Air computers and other items with its own M1 chips. Broadcom could be the next to go.

Apple [AAPL] is rumored to be dropping California-based chipmaker Broadcom [AVGO] by 2025 in order to produce more of its own chips.

Broadcom’s largest customer is Apple, which buys WiFi and Bluetooth connectivity chips for its iPhones as well as sophisticated chips for more complicated tasks like wireless charging. According to reports, Apple will also phase out Qualcomm [QCOM] cellular modem chips and replace them with its own.

In January 2020, Apple agreed to a $15 billion deal with Broadcom to provide components through the middle of 2023. Apple’s choice to shift chip development away from Broadcom and build in-house skills and experience makes financial sense, but it may harm the chipmaker.

Broadcom’s stock plummeted by less than half a percent in response to the announcement on 10 January, but it has since more than recovered: the stock is down 0.2% year to date but up 3.6% year to date.

The Dangers of Excessive Exposure

Apple accounted for around 20% of overall revenue in the fiscal year 2022, according to Broadcom’s most recent annual report, while its top five customers contributed 35%.

[I]t would be important if Apple brought any of the technology acquired from Broadcom in-house. In comparison to other businesses, such as Qualcomm, Apple has a slightly lower overall exposure” Stifel’s Ruben Roy, managing director of equity research, told Yahoo Finance Live.

Over the last decade or so, Apple has certainly brought a lot more of this type of technology in-house, and that’s a trend that’s going to continue,” Roy noted.

Despite this, Broadcom’s chips aren’t going away overnight, so the impact will be minor in the short run.

Bernstein analyst Stacy Rasgon believes the claims are an attempt by Apple to improve its arrangement with Broadcom.

While Apple’s loyalty (or lack thereof) is always part of the negative thesis on Broadcom’s shares,” Rasgon wrote in a note seen by Barron’s. He reiterated Broadcom’s ‘outperform’ rating.

Short-Term Growth Remains Strong.

Although Rasgon is bullish on Broadcom, he believes that if Apple is serious about replacing Broadcom’s processors, particularly the radiofrequency (RF) components it supplies, earnings per share might fall by 3-4% in 2025.

Rasgon noted in his memo that “RF revenue would be far more difficult to replace” than Bluetooth connectivity chip sales.

In the short term, despite inflation and the danger of a recession dampening demand for business software, Broadcom’s fourth-quarter 2022 results allayed any fears. Revenue increased 21% year on year to $8.9 billion.

Pacer Data and Digital Revolution ETF are two funds under consideration.

According to a KPMG survey, 65% of supply chain executives expect the semiconductor crisis to end in 2023, with only 20% expecting it to continue into 2024. Focusing on ETFs that own Broadcom is one-way investors might position themselves for a future resurgence.

With a weighting of 11.20% as of 13 January, the stock is the largest holding in the Pacer Data and Digital Revolution ETF [TRFK]. The fund is down 2.9% year to date but up 4.7% since the beginning of 2023.

With a weighted of 8.51%, it is also the top holding in the Invesco PHLX Semiconductor ETF [SOXQ]. The fund has lost 27.4% in the last year but gained 10.6% since the beginning of 2023.

Broadcom is the second-largest holding in the ProShares Ultra Semiconductors ETF [USD], accounting for 10.53% of the fund. The fund has lost 59.4% in the last year but gained 20.4% since the beginning of 2023.

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