Yesterday, I had the opportunity to delve into Broadcom's financials. From my analysis, it seems their strategic approach is akin to a short-term solution—solving immediate issues without considering long-term implications. In the realm of semiconductor chips, capital investment acts as a significant barrier to entry, as it takes years to develop intellectual property (IP) and establish relationships with fabrication facilities. However, the software landscape operates differently. Companies can easily transition, primarily when the software becomes excessively costly. It's not as easy for say Cisco to leave Broadcom
Considering the exorbitant prices quoted for VMware Cloud Foundation (VCF), it seems impractical to remain tied to VMware. Investing in alternatives like Nutanix appears more sensible, especially since Nutanix is actively recruiting former VMware personnel and partners. This indicates that there isn't an exclusive market that only VMware can dominate. VCF in some scenarios has ended up costing twice as much as the entire hardware footprint for the annual subscription. Money isn't unlimited, when budgets get hit, options are on the table.
Broadcom's acquisition history also warrants scrutiny. Acquiring CA in 2018, which boasted approximately $4 billion in annual revenue, and then Symantec in 2019, with around $2 billion in annual revenue, seemed promising. Notably, the consumer segment, including Norton LifeLock, now generates roughly $4 billion in revenue annually, without the aggressive cost-cutting experienced under Symantec's new management (Broadcom). Over approximately five years, this combined entity has achieved around $1.5 billion in annual revenue growth. In contrast, VMware achieved roughly $6 billion in revenue growth during the same period, without resorting to aggressive cost-cutting measures and maintaining trust within its ecosystem.
However, Broadcom's growth trajectory seems to be plateauing. Last year, their infrastructure software revenue grew by only 3%, falling short of the average inflation rate of 4.1%. In real terms, they even experienced a decline in revenue in the previous 12 months. The year before, their growth rate was 4%, indicating a gradual slowdown. This raises concerns about their ability to meet their ambitious target of returning $94 billion to shareholders, considering the stock issued for the acquisition and the cash outlay involved. This short-sighted approach risks eventual stagnation, as customers are prone to migrate away from companies that fail to adapt.
In comparison, VMware consistently achieved a growth rate of 9% before experiencing a slowdown in 2022 due to acquisition-related challenges. The endorsement of Broadcom by Jim Cramer, while notable, doesn't alter the underlying concerns regarding Broadcom's long-term viability.