Option Trade
Broadcom Ltd (NASDAQ:AVGO) Calls 
Thursday, December 8, 2016

** OPTION TRADE: Buy the AVGO JAN 20 2017 175.000 call at approximately $4.30. Place a pre-determined sell at $8.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.75.

by Ian Harvey

Thursday, December 8, 2016

Broadcom Ltd (NASDAQ:AVGO), the combined entity that was formerly known as Avago and Broadcom, which is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions, will report after the markets close today. Wall Street analysts are looking for earnings of $3.37 per share on non-GAAP revenue of $4.1 billion. Gross margins should be at 60.5%, up from 59.3% last quarter.

Wireless revenue (26% of total sales) is anticipated to be up 30% because of strong smartphone builds into the holiday season.

Enterprise storage (15% of revenue) is expected to be up in the low single digits sequentially, driven by a strong seasonal finish to the year. The industrial semiconductor business typically slows into the back half of the year and could be down as much as 20% sequentially.

Notably, Broadcom has beaten earnings estimates in each of the last four quarters with an average positive earnings surprise of 7.00%. However, the company’s return of 13.14% compared unfavorably with Elec-Semiconductors Industry’s gain of 38.77% on a year-to-date basis.

Nevertheless, it is believed that the stock will rebound going ahead driven by its strong product portfolio, impressive pipeline and continuing cost-synergy realization from the Avago merger. Moreover, the IT platform integration is expected to help lower operating expenses.

Early November, the company revised its revenue outlook, which is now anticipated to be in the range of $4.100 billion to $4.175 billion. GAAP gross margin is still projected at 60.5% (+/- 1%), while operating expenses are estimated to be approximately $108 million.

Management expects wired revenues to remain flat sequentially, as the company tries to resolve supply constraints. Wireless revenues are anticipated to surge more than 30% on a quarter-over-quarter basis. Enterprise storage is anticipated to grow in the low single digits sequentially driven by positive end-market seasonality.

Shares of Broadcom Ltd. have stabilized over the past couple of days after having rough time last week. However, Year to date shares, Broadcom are up almost 20%.

Avago Technologies’s 50-day moving average price is $171.73 and its 200-day moving average price is $165.26. Avago Technologies has a 52-week low of $114.25 and a 52-week high of $179.42. The firm’s market capitalization is $67.74 billion.

Why Broadcom Ltd?

The merger between Avago and Broadcom created a best-in-class semiconductor company that trades below its peers.

Broadcom’s extensive product portfolio serves multiple applications within four primary end markets – wired infrastructure, wireless communications, enterprise storage, and industrial & others. The company’s focus on multiple target markets and geographies mitigates operating risks and lessens its exposure to volatility in any single market.

Analyst Input

Pacific Crest analyst John Vinh thinks, "investors should own Broadcom ahead of the Q4 results on December 8." He views the consensus estimates as achievable with weak iPhone 7 expectations as already baked into the price. The analyst has a price target of $215 per share.

It was just last that week that RBC analyst Amit Daryanani thought AVGO could report a sizeable upside beat to earnings per share (EPS). RBC has a price target of $190 per share.

Also, Avago was upgraded by Zacks Investment Research from a “hold” rating to a “buy” rating in a research report issued on Thursday. The firm currently has a $191.00 price target on the semiconductor manufacturer’s stock. Zacks Investment Research’s target price suggests a potential upside of 12.00% from the company’s previous close.

According to Zacks, “Broadcom will continue to enjoy synergistic benefits from the merger with Avago, which will drive  future profitability. In addition, the company maintains an efficient global supply chain with a variable, low-cost operating model that enables it to maintain sustainable revenue growth and expand margins. Broadcom is expected to benefit from rapid increases in data center IP and mobile data traffic to emerge as the undisputed leader in the enterprise storage market. Meanwhile, estimates have been stable lately ahead of the company's Q4 earnings release. The company has positive record of earnings surprises in recent quarters. However, Broadcom’s rapidly evolving technical standards and high R&D costs associated with new products put pressure on its profitability to some extent.”

Several other research firms have also issued reports on DG…..

  • Bank of America Corp. reissued a “buy” rating and set a $215.00 price target (up from $210.00) on shares of Avago Technologies in a research report on Tuesday, September 6th.
  •  B. Riley reissued a “buy” rating and set a $200.00 price target on shares of Avago Technologies in a research report on Tuesday, August 30th.
  • Susquehanna initiated coverage on shares of Avago Technologies in a research report on Tuesday, September 20th. They set a “positive” rating and a $200.00 price target on the stock.
  • Finally, Mizuho boosted their price target on shares of Avago Technologies from $190.00 to $200.00 and gave the stock a “buy” rating in a research report on Monday, August 29th.

Three investment analysts have rated the stock with a hold rating, thirty-eight have issued a buy rating and one has assigned a strong buy rating to the stock. The company presently has an average rating of “Buy” and an average target price of $205.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the AVGO JAN 20 2017 175.000 call at approximately $4.30. Place a pre-determined sell at $8.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.75.

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