Broadcom Gets Apple Pact, but Large Caveats Bring Risks

Broadcom Inc. (NASDAQ: AVGO | AVGO Price Prediction) may have found a deeper friendship, but the move is far from an assured success for the long term. The company announced after Monday’s close that certain subsidiaries of the company have entered into a “statement of work” with Apple Inc. (NASDAQ: AAPL). The supply arrangement is said to be for two years of new programs.

Under terms of the statement of work, Broadcom has agreed to supply Apple with specified, radio-frequency front end components and modules for Apple’s smartphones, tablets and watches. Broadcom also will maintain and allocate sufficient manufacturing capacity and other resources to Apple to make these products.

Where things get difficult to project longer term is Apple’s obligation here. The SEC filing showed that Apple intends to source all of its requirements for such radio-frequency front end components and modules from Broadcom. That said, Apple is not required to source all of those components, and the filing also left in the clause that the intention will be so long as Broadcom is able to meet certain development, supply and quality commitments.

Monday’s press release did not go into details on specifics for revenues. It said, “The agreement also provides for various pricing schedules and methodologies applicable to purchases of the covered company (Broadcom) products.”

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Shares of Broadcom closed up 1.9% at $280.21 ahead of the news on Monday, and the shares were seen trading up about 2.6% at $287.70 in Monday’s after-hours trading session. With a market cap of $111 billion at the close, Broadcom’s 52-week trading range is $197.46 to $323.20.

It likely will be some time before the full aspects of the revenues can be fully factored into the estimates. Broadcom generated $20.85 billion in sales in fiscal year 2018. The estimates from Refinitiv are for Broadcom to generate $24.4 billion in fiscal 2019 revenues and $26.1 billion in 2020 without the new Apple announcement.
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