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Broadcom is the poor man's Nvidia: Strategist

Artificial Intelligence. A groundbreaking innovation for humanity that has seemingly seeped into every conversation across a wide range of companies. With so much buzz around this topic, how are investors supposed to sift through what is useful and what is fluff? Nancy Tengler, Laffer Tengler Investments CEO & CIO joins Yahoo Finance to breakdown two stocks that have Wall Street talking: Broadcom (AVGO) and Interpublic Group of Companies (IPG).

Tengler gives extensive insight to both companies, commenting that Broadcom has recently received a debt rating upgrade from S&P Global, shows strong capital return, with dividend increases to shareholders, and are actively expanding company exposure to AI. IPG, on the other hand, seems more defensive on AI, with a weak 2024 revenue outlook, and concerns about organic revenue growth, Tengler argues.

For more Good Buy or Goodbye, be sure to click here

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video transcript

[MUSIC PLAYING]

JULIE HYMAN: It's a big noisy universe of stocks out there. Welcome to Good Buy or Goodbye, brought to you by E-Trade from Morgan Stanley, our goal to help cut through that noise to navigate the best moves for your portfolio. And the noise has been incredibly loud this year around one term, artificial intelligence.

Of course, Nvidia has long-dominated the conversation. But now other AI related investing ideas are starting to pop up and some companies already seem to be falling behind the curve. What's the best way to play it right now? I'm here with Nancy Tengler, CEO and CIO of Laffer Tengler Investments.

Thank you, first of all, so much for being here. Really appreciate it. So let's get right to it. When we're talking about this theme, your buy is Broadcom. And we'll get to I sort of lastly here. But I do want to dig through the various reasons, Nancy, for your buy on this good buy on this. First of all, the company getting a debt rating upgrade. And it's sort of unusual that it's getting it at this time. Talk us through that.

NANCY TENGLER: Well, of course, they just completed the VMware acquisition and doing so doubled up the debt. But the company has done a really good job with free cash flow and returning-- cashback to shareholders as well. And so I thought it was timely. And we'll probably see another one in the future.

JULIE HYMAN: Interesting, yeah, and unusual. Definitely, if they're increasing their debt to that extent. You alluded to this, the strong capital return here. So do you expect that to continue and even grow as we go into the next year?

NANCY TENGLER: Yeah. Hock Tan has done a great job of returning cash to shareholders through share buybacks and through dividend increases. And the historical dividend increase on this stock is like 25% over the last five years. Now that's probably going to slow after-- they report after the bell today.

JULIE HYMAN: Yes, they did.

NANCY TENGLER: So fingers crossed. But even if the stock goes down, it's a great opportunity to jump in. But the dividend growth will probably slow on the heels of the VMware acquisition.

JULIE HYMAN: Right. That would make sense. And then finally, let's get to the AI exposure, right? This is something following in the heels of Nvidia and some of the huge numbers that it's been putting up this year, I think a lot of investors have asked, OK, where next? Where are we seeing it next? We got a little hint of it from AMD, for example. What do you expect from Broadcom?

NANCY TENGLER: Yeah. So in our firm, we call Broadcom the poor man's Nvidia. It's getting about 25% of revenues. That's their expectation from super enterprise cloud computing chip sales. But now they're also sort of diversifying that with 50% of total revenues coming from software. So we like the diversification you get here. They are a leader in AI. They expect to grow about 50% quarter-over-quarter, 200% year-over-year, so in just that portion of the business.

So I think this is a place where you can hide out for a very long period of time. The stock has been a supercharged performer for the last five years. I bought it when the Computer Associates acquisition was made, and everybody hated it. I think that was about $180 a share. It's trading close to $1,000.

JULIE HYMAN: Yeah. That was a long time ago.

NANCY TENGLER: Yeah.

JULIE HYMAN: So let's talk about the potential risk here, though. What could go wrong for your thesis on Broadcom?

NANCY TENGLER: Yeah. Well, so I mean, they do have customer concentration risk. And so Apple's one of their biggest customers. We know Apple is getting into the chip business. So that's something to watch. But I think this management team is pretty savvy. And that's why this pivot into generative AI enterprise computing is really important for them, because they're ahead of the game. I mean, they're behind Nvidia, but they're ahead of everyone else. So I think they're going to be just fine. But that, of course, is a risk.

JULIE HYMAN: OK. And you do hold Broadcom, we should mention.

NANCY TENGLER: Yeah. It's one of our largest holdings across all of our strategies.

JULIE HYMAN: That makes sense. You're very enthusiastic about it. OK, now, let's talk about one that you are not so enthusiastic about. This one not as much directly in the chip or the AI industry. But there is a connection here. And it's Interpublic Group, which is the big advertising company, IPG as it's known. So let's talk about your more bearish thesis when it comes to IPG.

And first of all, here, they have a different stance on AI than some of their competitors within digital advertising. So what are-- what are they saying about it?

NANCY TENGLER: Well, they're not saying anything. And that's part of the problem. I mean, we sat on the conference call, we owned the stock, we're now out of the stock. Our investing theme is old economy companies that are embracing the digital revolution, generative AI, cloud computing, and the suppliers of those products. So Broadcom would be a supplier. We want to own old economy companies that are really engaged and their competitors all have joint ventures with other-- I think Omnicom has it with Google and Meta. I don't know. I can't remember.

JULIE HYMAN: WPP maybe with Meta, yes. Yeah. So the other ones are doing it in IPG isn't doing it.

NANCY TENGLER: And they're very defensive about it. They're saying, well, we're using digital advertising, but they're not embracing this. And I think generative AI for advertising is crucial.

JULIE HYMAN: Interesting. OK. So you also are looking at weakening growth here from the company. What's fueling that? Is it the general macro environment? Or is it something more specific to IPG?

NANCY TENGLER: I think it's more specific to IPG. This is a company that should be growing in line with the rest of the peer group, and they're lagging way behind. Next year, if you're in it, you may get a chance to sell it on a bounce, because next year we're going to get all the political advertising. It's already starting. That usually is a benefit for these companies. But you really need to have, for the long-term holding of the STOCK you need for management to catch up on the whole AI, generative AI issue.

JULIE HYMAN: OK. And then finally, organic revenue growth might not be as resilient. So there is some stuff that's specific to IPG, but there's also some stuff going on in the broader universe. But here's a look at IPG, which is the topline here versus its peers. And you can see the numbers on the topline here are smaller than most of the others.

NANCY TENGLER: Yeah. And generally speaking, I mean, even though those look like small differences, the impact on margins is super powerful. And so if you've got Omnicom that's got 3 and 1/2 to 5% while IPG is growing 1 to 2, that's a material difference. And so we are out of the stock. We're probably likely to stay out of the stock. But if you own it, I still think you might get a shot at selling it at a little higher levels.

JULIE HYMAN: All right. And then finally, just like we asked about the risk for Broadcom, we ought to ask about the upside risk for this one. What could go right? Could, I guess, a pivot all of a sudden if they're changing what they're going to do with regard to AI?

NANCY TENGLER: Yeah. And this management team has not shown a willingness to even admit they're behind. But if they do pivot, then I think it's a really interesting opportunity to step in and buy a beaten-down name that's trading at a pretty decent valuation, because a pivot will improve their revenue growth clearly.

JULIE HYMAN: All right. And as you mentioned a couple times, you exited the stock at the end of September. You like Broadcom. Let's just recap. The good buy and the goodbye. Nancy telling investors, buy Broadcom. The stock got that S&P debt upgrade with a positive outlook. There's strong capital return and increasing AI exposure. On the other side, you're saying avoid IPG. Management justifying that limited AI exposure approach. Revenue and operating margin growth expected to be weak in 2024. And similarly, organic revenue growth might not be as resilient as initially anticipated.