Day: September 20, 2024

The U.S. economy has a stellar track record of producing the world’s most valuable companies. United States Steel became the first $1 billion company in 1901. General Motors then rode the automotive revolution to become the first $10 billion company in 1955. In 2018, Apple became the first to cross the $1 trillion milestone thanks to the success of its iPhone.

Apple remains the world’s largest company with a $3.3 trillion market capitalization, but it has since been joined in the trillion-dollar club by tech giants Nvidia, Microsoft, Amazon, Meta Platforms, and Alphabet.

Broadcom (NASDAQ: AVGO) might be set to join them. It’s currently valued at $761 billion, so its stock only needs to gain 31.4% from here to earn its membership. Here’s why I think it will happen.

Broadcom stock has soared recently, prompting a split

Broadcom was originally a semiconductor and electronics company, but since merging with Avago Technologies in 2016, it has been on an acquisition spree. It spent a total of nearly $100 billion buying semiconductor equipment company CA Technologies in 2018, cybersecurity giant Symantec in 2019, and cloud software developer VMware in 2023.

The acquisitions have propelled Broadcom stock to a 465% gain over the last five years and, earlier this year, it soared past $1,800, which made it somewhat inaccessible to investors with small portfolios. As a result, Broadcom’s management team decided to execute a 10-for-1 stock split, which increased the number of shares in circulation tenfold and reduced the price per share by a proportional amount.

The split went into effect on July 12, so investors can now buy one share of Broadcom for just $162 as of this writing. That spells an opportunity because the company’s growing presence in artificial intelligence (AI) could drive further upside from here.

A multifaceted artificial intelligence company

Broadcom has placed a heavy focus on AI across its organization over the past year to capture what could be one of the most valuable technological revolutions in history.

On the semiconductor side, Broadcom makes data center accelerators, which are specially designed chips for AI development. It also supplies networking equipment for data centers, including Ethernet switches that regulate how quickly data travels from one point to another. High-quality switches are critical to AI infrastructure, because data needs to rapidly flow through tens of thousands of graphics processors (GPUs) and accelerators.

During the recent third quarter of fiscal 2024 (ended Aug. 4), Broadcom said its custom AI accelerators segment grew by three-and-a-half times compared to the year-ago period thanks to surging demand from hyperscalers (which typically includes Microsoft, Amazon, and Alphabet). The company also said its Tomahawk 5 and Jericho3-AI switches delivered fourfold sales growth compared to the year-ago period.

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Outside of the semiconductor business, Symantec is weaving AI into its cybersecurity products. For example, it launched SymantecAI earlier this year, which is a chatbot capable of answering users’ queries about their endpoint protection.

Then, there is VMware, which serves as the software layer of the data center to help organizations optimize their infrastructure. They can use VMware to create virtual machines, meaning multiple employees can plug into the same server to utilize all of its capacity. That ensures no computing capacity goes to waste, which is critical right now due to the short supply of high-powered GPUs and data center hardware.

Broadcom expects to deliver $51.5 billion in total revenue for the entirety of fiscal 2024, which will wrap up at the end of October. The company’s guidance initially suggested $11 billion of that would be attributable to AI across its businesses, but it just raised that estimate to $12 billion, which highlights the significant momentum in this emerging space.

Broadcom’s (mathematical) path to the $1 trillion club

As I touched on at the top, Broadcom has a market cap of $761 billion right now, so its stock only needs to gain 31.4% from here to place the company in the $1 trillion club.

The company isn’t consistently profitable on a GAAP basis, so it can’t be valued using the traditional price-to-earnings (P/E) ratio. However, we can value it using the price-to-sales (P/S) ratio, which divides its market cap by its annual revenue.

Broadcom currently trades at a P/S ratio of 16. If that number remains constant, the company simply has to grow its annual revenue by 31.4% to justify its entry into the $1 trillion club. Wall Street expects Broadcom’s revenue to grow by 17.2% in fiscal 2025, which won’t be enough, but it could get there in fiscal 2026 if it can grow by that amount again.

There is a caveat. Although Broadcom’s P/S ratio is down from its peak of around 19, it’s still very expensive compared to its average of 8.7 over the last five years:

It’s clear why investors are willing to pay a premium for the stock right now — Broadcom’s AI semiconductor products are delivering explosive growth, and its acquisitions are adding a tremendous amount of value. However, there is no guarantee investors will be receptive to such a high P/S ratio over the long term, and a reduction back to its five-year average could add years to Broadcom’s quest to join the $1 trillion club.

Therefore, while Broadcom will be a spectacular stock to own during the AI revolution, investors should maintain a very long-term outlook (perhaps of a decade or more) if they buy it today. That will give the company plenty of time to grow into its current valuation.

Should you invest $1,000 in Broadcom right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Stock-Split Stock Set to Join Nvidia, Apple, Microsoft, Amazon, Alphabet, and Meta In the $1 Trillion Club was originally published by The Motley Fool

Following a monthslong battle over CEO Anne Wojcicki’s plans to take 23andMe private, all seven independent members of its board resigned en masse Tuesday.

The move is almost certainly the final nail in the coffin for the embattled company known for its mail-order DNA-testing kit. Since going public via merger with a special purpose acquisition company (SPAC) in 2021, 23andMe has never turned a profit. Its price on IPO day was $10; so far in 2024, it has yet to reach a $1 valuation. Following the resignation of all its independent directors Tuesday, the stock fell to its rock bottom: $0.30. (As of midday Wednesday, it’s back to $0.36.)

The board includes Sequoia Capital’s Roelof Botha as well as Neal Mohan, who took the helm as CEO of YouTube last year after Susan Wojcicki, Anne’s late sister, stepped down.

“After months of work, we have yet to receive from you a fully financed, fully diligenced, actionable proposal that is in the best interests of the non-affiliated shareholders,” Botha, Mohan et al wrote in a letter addressed to Wojcicki. “While we continue to wholeheartedly support the Company’s mission and believe deeply in the value of the personalized health and wellness offering that you have articulated, it is also clear that we differ on the strategic direction for the Company going forward.”

Due to that difference—and the fact that Wojcicki controls 49% of 23andMe votes—they resigned. Wojcicki is now the only board member left.

In an internal memo Wojcicki circulated shortly after the mass resignation, she said the decision left her “surprised and disappointed.” But despite the pressure, she’s bullish on taking the company private, saying it’s “still the best plan for the company.” She’s now “immediately” on the hunt for new independent directors who support that plan, and said more updates would follow on Thursday.

The company has been flailing this year. Last month, in a recent bid for cash, it began writing prescriptions for GLP-1 weight loss drugs like Ozempic and Wegovy through its telehealth subsidiary, Lemonaid Health.

It’s not enough. DNA test sales have dropped off, a research collaboration with GlaxoSmithKline concluded last year, and a recent data breach impacted nearly 7 million customers, which led to a rush of lawsuits and a $30 million settlement. Once valued at $3.5 billion, 23andMe’s market cap now hovers below $200 million.

Nonetheless, the drug development and genetic sequencing that the firm has been throwing its weight behind will eventually bear fruit, Wojcicki told CNN in February. “The vision and where we’re going is solid, but the path to get there is more turbulent.” Unfortunately, the board is no longer willing to stay the course.

This story was originally featured on Fortune.com

• The Fed looks like it’s following the same path it did in 1995, according to TS Lombard.

• That sets the stage for the economy to avoid a recession as it did in the 90s, the firm said.

• It’s also great news for stocks, as the S&P 500 more than doubled in value that decade.

The Fed is following a 30-year-old playbook with its interest rate moves — and that’s good news for the US economy, according to TS Lombard.

The firm pointed to the central bank’s 50 basis point cut to the federal fund rate this week. That was exactly what investors were looking for, and it could lay the groundwork for a booming stock market and economy, according to Dario Perkins, the firm’s managing director of global macro.

He notes that the Fed’s latest rate cut has created a parallel to what central bankers did in 1995, when Fed officials eased the Federal funds rate from a peak of 6% to around 4.75% over three years. That took interest rates back to a neutral level, stave off a recession, and ultimately spark a new economic boom.

By 1998, GDP growth had accelerated from 4.4% to nearly 5%. Meanwhile, the S&P 500 soared 125% by the end of the Fed’s cutting cycle, according to data from the American Institute for Economic Research.

Fed officials look on track to pull off the same maneuver, Perkins suggested, attributing this week’s jumbo-sized rate cut to central bankers’ belief that they were further away from the neutral rate than they were several decades ago.

“Our view is that this cutting cycle will probably play out like Greenspan’s mid-course ‘re-calibration’ of policy in the mid-1990s,” Perkins said in a note on Wednesday. “Even if the US labour market deteriorates more than we expect and the Fed falls behind the curve, there is no real threat of a deep recession.”

Stocks soared a day after the big rate cut. Despite wobbling in the hours after the Fed’s rate move, the major indexes hit fresh records in Thursday trades.

“We think the soft landing is still very much in play,” Perkins added. “And while the danger of the Fed falling behind the curve is real, we think the repercussions would be manageable. It is hard to foresee anything worse than a mild recession,” he later wrote.

Some forecasters are still wary of the Fed’s latest policy move due to concerns that cutting interest rates too quickly could ignite a fresh bout of inflation. The market, though, has mostly shrugged off that risk, with one-year forward inflation expectations remaining just above 2% in September, according to Cleveland Fed data.

Read the original article on Business Insider

People often think they don’t have any choice about taking the IRS-mandated required minimum distributions from their retirement accounts – but they do. While you can’t skip making the withdrawal they can choose how to time it in a way that works best for their individual financial situation.

Required minimum distributions – RMDs, for short – kick in at age 73 and apply to all of your tax-deferred retirement accounts, such as regular Individual Retirement Accounts and 401(k) accounts. Neither the original principal or the gains in those accounts ever have been taxed, and the IRS is willing to wait just so long before the agency insists on taking its bite of the money.

You, however, can choose when and how to take the distribution, whether that’s at the beginning of the year, the end of the year or in a stream of monthly, quarterly or semi-annual payments. Each has its pluses and minuses, but none will change the amount of your RMD – that’s based on the value of your retirement accounts at the end of the previous year and your age.

A financial advisor can help you structure your RMDs to your best advantage.

Ways to Schedule Your RMDs

Early in the year lump sum

The “just get it over with” approach works for people who need the cash flow during the year and helps avoid needing to borrow money or put expenses on credit cards and paying the resulting interest. You also can put the cash into another investment right away, as long as it’s not a tax-advantaged retirement account.

On one hand, this approach guarantees that you won’t forget to take your RMD but it also means all that money won’t be generating any additional gains in your retirement account, although you can deposit some or all of the cash to earn interest. Another potential downside is that if tax laws change on RMDs – such as in March 2020 when Congress eliminated RMDs for that year because of the pandemic – you’ll have already taken your distribution and miss out on that break.

Talk to a financial advisor to weigh the opportunity costs of your investment options.

Monthly, Quarterly, or Semi-Annually

This approach smooths your cash flow all year if you’re using the money to pay your living expenses. It also keeps some of your RMD money in your investments for part of most of the year to generate new gains. With a quarterly distribution schedule, you can time the distributions and use the cash to cover your quarterly estimated tax payments on other income, as well as the RMD itself.

Late in the year lump sum

If you don’t need cash to cover expenses earlier in the year, leaving your RMDs until the end of the year maximizes the potential investment returns on the RMD money, while also leaving the option to take advantage of any changes to RMD rules that take place during the year. You also can withdraw a lump sum large enough to cover all your income tax for the year.

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Tax Considerations

Whatever schedule you use for RMDs won’t change the amount of taxes due on the distribution. However, your RMD schedule can affect your other taxes. If you make quarterly estimated tax payments based on your RMD amount and all your other taxable income, you’ll lose the use of your tax money for the rest of the year.

But there is a very neat trick that allows you to simplify your tax payments using RMDs and hold on to your tax money all year long.

Here’s how it works: To avoid a penalty for underpaying your estimated federal taxes, you need to pay either 90% of your tax bill for the year or 100% of your tax bill from the previous year through withholding or estimated tax payments throughout the year. However, any taxes withheld from retirement account distributions are considered “ratable” – paid evenly throughout the year – no matter when the payment is made.

This means you can take your RMD late in the year when you can make the most accurate estimate of your tax bill and have that amount withheld from your RMD to cover your taxes for your RMDs and other income. This eliminates the hassle of making estimated payments and the risk of overpaying your estimated taxes and giving the IRS an interest-free loan all year instead of using the money yourself.

For personal advice on how to maximize your retirement income and minimize taxes, get matched with a financial advisor.

Bottom Line

When and how often you take your RMDs during the year can help you manage your cash flow and maximize the potential investment gain of your RMD money before it’s withdrawn.

Tips

• Balancing taxes and retirement income – and figuring out how to minimize taxes in retirement – is a crucial issue. A knowledgeable financial advisor help you decide how to structure and coordinate these payments over the span of your retirement.

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

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