Broadcom is a leading semiconductor devices manufacturer, employing over 20,000 people worldwide. The company went public at a very fortunate time, just a few months after the bottom of the Financial Crisis in 2009. As a result, the stock has been in an uptrend almost since day one. Nearly 14 years later now, the share price is up by an astonishing 3530%, not counting the dividends. In fact, Broadcom ‘s annual dividend is now higher than the stock’s IPO price. What a long-term investment, indeed!
It hasn’t been a smooth ride, though. In just three months during the first quarter of 2020, AVGO plunged by more than 50%. Between January and October, 2022, it lost another 38% which the bulls are still trying to recoup in full. After reading about a long-lasting uptrend interrupted by two notable declines, the experienced Elliott Wave analyst already knows what Broadcom ‘s price chart would look like. Let’s see it anyway.
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The weekly chart reveals the stock’s entire progress since August, 2009. It can easily be seen as a five-wave impulse, labeled I-II-III-IV-V. Wave II is an (a)-(b)-(c) expanding flat correction, while wave V has yet to exceed the top of wave III and complete the pattern. Note how neatly the sequence fits between the parallel lines of a trend channel drawn through the highs of I and III and the lows of II and IV.
Broadcom Is Riskier Than Its Financials Imply
The theory states that if this count is correct, we can expect a new all-time high in wave V. On the other hand, a three-wave correction follows every impulse and usually erases the entire fifth wave. This means that Broadcom stock is likely to conquer the $700 mark and maybe approach $800. Instead of joining the bulls after that breakout, however, investors should prepare for a major bearish reversal. The negative phase of the Elliott Wave cycle can drag the price back to the support of wave IV near $400 a share. That would be another ~50% bear market before the uptrend can resume. We’d rather observe from a safe spot.
From a fundamentals point of view, a strong case can be made that Broadcom is a leading, profitable and growing business. We agree. At a forward P/E of just 15, one can say the stock is also undervalued. But keep in mind that this is the same kind of pattern that brought the stocks of Intercontinental Exchange, OneWater Marine and Verizon down, as well, to name a few.
Not to mention that Broadcom is in the process of acquiring VMware for over $60B. History is full of big, promising takeovers that later disappointed and led to significant share price declines. Think of AT&T buying Warner Bros. for $85B and then selling it to Discovery at half the price. Or when Fidelity National acquired Worldpay in 2019, only to spin it off in 2023 at an $18B loss. Only time will tell if Broadcom is going to regret buying VMware. It also might be a recession that eventually derails the stock. The point is that its weekly price chart is sending us a warning already.
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