Broadcom plans to spend its cash pile on buying back as much as $10 billion worth of its common stock, dampening IT department hopes that it might invest in innovation or make its products more affordable.
Looking at the announcement of Broadcomm’s buyback plan, Scott Bickley, advisory fellow at Info-Tech Research Group, said this is consistent with Broadcom’s historic strategy and holds no good news for enterprise IT leaders.
“They shouldn’t expect any relief coming their way soon commercially,” Bickley said. “If they are planning a large capital spend on the server side, they shouldn’t be planning to exploit any cracks in the Broadcom armor.”
When it comes to adding new technologies to their product range, vendors’ options range from researching and developing them internally to acquiring another company that has done the work.
Acquisition over innovation
Historically, Broadcom has focused on acquisitions rather than internal innovation. “As a percentage of revenue, R&D sits on the lower end of that spectrum,” Bickley said. “They are around 16 percent and the industry average is between 15 and 22 percent. They are in the low end, well in the bottom third. Broadcom spends more on the acquisition of already developed technologies.”
But buying rather than building is only part of Broadcom’s typical strategy. It is typically quite aggressive with those purchased capabilities.
“They spend a premium on acquiring, but they then [implement] ruthless cost cutting and raising prices to pay that debt down quickly,” Bickley said.
That’s been apparent since the company’s acquisition of virtualization software vendor VMware, where licensing prices have leapt upwards — although many customers have little choice but to continue to pay the spiralling prices.
Broadcom’s statement quoted CEO Hock Tan as arguing that the buyback is from a position of strength.
“Today’s announcement of a $10 billion share repurchase program reflects the Board’s confidence in the strength of Broadcom’s diversified semiconductor and infrastructure software product franchises,” Tan said. “In particular, we are uniquely positioned in mission critical infrastructure software and enabling hyperscalers to drive innovation in generative AI into their expanding subscriber platforms.”
As a practical matter, Broadcom’s relatively low stock price likely has less to do with Broadcom specifically and reflects an overall plunge in all stock prices, mostly due to Wall Street fears over the tariff war.
“Based on the skyrocketing annual revenues to over $50B in FY24, up from around $36B in FY23, increasing gross margins and free cash flow along the way, and driving EBITDA through the roof, it is clear the company is in solid financial shape,” Bickley said. The stock buyback now “is a smart business move.”
