Why Broadcom Inc (NASDAQ: AVGO) stock is under pressure

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Broadcom Inc (NASDAQ: AVGO) stock crashed over 15% on July 12th, 2018 (as of 12:04 PM GMT-4; Source: Google finance) post CA deal. Moreover, RBC downgraded the stock and lowered the stock target price to $300.

The group made a $18.9 billion deal to acquire CA Technologies (NASDAQ:CA). The group sees this move would push long-term adjusted EBITDA margins to over 55% and be immediately accretive to EPS, which would offer for sustained double-digit compound annual growth in EPS. CA stockholders would receive $44.50/share in cash. The group would fund the deal with cash on hand and $18B in new fully committed debt. They intend to maintain investment grade rating on the back of the cash flow and intent to quickly deleverage.

The group extended collaboration with HP Enterprise (NYSE: HPE) on server storage. This partnership comprises Broadcom 24-port RAID controller in HPE’s ProLiant Gen10 servers. Broadcom would lead a U.3 universal drive cage demo using NVMe, SAS and SATA drives.

For the second quarter of fiscal 2018 the group’s gross margin reached 66.6%, EBITDA reached to 52.3% while free cash flow comprised 42.3% of revenue. The group returned over $1.5 billion to stockholders by repurchasing more than 6.4 million shares. As per the segment performance,  the wired revenue rose 9% yoy to $2.3 billion, while rose 22% sequentially. The wired segment accounted 46% of their total revenue driven by demand from cloud data centers and a seasonal recovery in broadband access. Strong rise in networking and compute offloading in cloud data centers and strong growth spending by enterprise IT.

Enterprise storage revenue reached $1.16 billion during the second quarter which accounted 23% of the total revenue. Enterprise storage segment revenue surged 63% on a year-on-year and delivered a 17% rise sequentially. The overall sequential revenue growth was boosted by broad strength from the enterprise IT sector.

For third quarter fiscal 2018, the ongoing spend in enterprise IT would drive sequential growth in enterprise storage, while generated a growth in cloud storage capacity would lead to a recovery in hard disk drive demand.

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