Broadcom most likely to feel the fallout from US-China trade war

Wall Street was feeling pretty good about Broadcom in mid-March as its semiconductor business appeared to be turning the corner and CEO Hock Tan saw “meaningful growth” in the second half of the year.

A lot has changed since then.

Trade relations between the US and China have soured. One of Broadcom’s biggest customers was banned from buying American components. Spending on data centres has remained sluggish. So the big question on analysts’ minds heading into Thursday’s post-market earnings report is whether Tan’s prediction for the latter part of 2019 remains intact.

In the past four weeks, the average analyst estimate for third-quarter revenue fell by about $50m to $6.1bn, while expectations for adjusted profit fell by 5c to $5.71 a share, according to data compiled by Bloomberg. With the stock down 13% from an April 17 record, some on Wall Street see potential for the stock to rally as expectations have fallen.

“We view [Broadcom] shares as attractive ahead of earnings given what appears to be lower expectations and our belief that the company’s longer-term growth and profitability prospects remain solid,” MKM Partners analyst Ruben Roy wrote in a research note on Monday.

The California-based company’s products and global customer base make its results a key indicator for how trade tensions are affecting the semiconductor industry. Almost half of Broadcom’s revenue last year was linked to China. Huawei, which the US government is blacklisting, purchases Broadcom switch chips that are a key component of the Chinese company’s networking gear.

Broadcom is also a major supplier of chips to Apple and recently signed an agreement with the iPhone maker to extend that relationship. Analysts and investors use the chip maker’s commentary on the wireless market to get a window into demand in the smartphone market.

Bank of America analysts led by Vivek Arya reiterated their buy rating on Broadcom on Monday, saying the effects of the Huawei ban and macro-economic risks are “well expected”.

“Key focus will be commentary on second-half recovery, cloud capex spending and smartphone unit trends,” they wrote in a research note.

The earnings release is due after the close of trading on Thursday. Broadcom options prices imply a 7% move in the shares, compared with an average 4.5% over the past eight reports, according to data compiled by Bloomberg.

• Bloomberg