Amid a soft opener for the broader tech segment on Tuesday, Broadcom (NASDAQ:AVGO) and Apple (NASDAQ:AAPL) just announced a partnership expansion that should benefit both companies long-term. Under the agreement, Broadcom will develop 5G radio frequency (RF) components and wireless connectivity components, according to a statement from Apple. As of this writing, AVGO stock is popping 2% on the news while AAPL stock is slipping 1%.
According to Reuters, the multi-year deal will involve the design and manufacturing of RF components in several U.S. facilities, including Broadcom’s facility in Fort Collins, Colorado. Per the report:
“The two companies did not disclose the size of the deal, with Broadcom saying only that the new agreements require it to allocate Apple ‘sufficient manufacturing capacity and other resources to make these products.’”
Previously, these two tech giants had inked a three-year, $15 billion agreement that was scheduled to expire in June. “It’s good that it removes that overhang,” said Bernstein analyst Stacy Rasgon about the new deal, “Broadcom has existed over the years with a number of these long-term agreements with Apple. Sometimes they have them and sometimes they don’t.
For the year so far, AVGO stock has gained about 25%. Meanwhile, AAPL stock is up more than 35%. Both stocks exceed the performance of the Nasdaq Composite, which is up a little more than 20% during the same period.
AVGO Stock Rises on a Win-Win Arrangement
For Broadcom, this collaboration offers encouragement to AVGO stock investors concerned about Apple’s relationship with the company. As Bloomberg pointed out, the two enterprises have at times had a contentious dynamic, causing many AVGO investors to fret that Apple will seek greener pastures.
It’s not an insignificant source of anxiety, to be sure. According to The Wall Street Journal, Apple represents 20% of Broadcom’s revenue. Earlier this year, Bloomberg broke a story that Apple planned to replace a Broadcom chip in its devices with an in-house design. Therefore, today’s news helps set the framework toward a more positive, productive trajectory.
Adding to the benefits for AVGO stock is that Apple is also incentivized to soothe its relationship with Broadcom for its own agenda. From the competitive standpoint, the recently disclosed agreement “may help alleviate Apple’s dependence” on Qualcomm (NASDAQ:QCOM), Bloomberg reports.
Against a broader view, the agreement will also help Apple better ensure that it secures critical components following the disastrous supply-chain crunch caused by the pandemic. Additionally, while the present ecosystem is still overwhelmingly dependent on Asia (and in particular China), the deal helps invigorate the U.S. semiconductor manufacturing space.
Why It Matters
According to TipRanks, Wall Street analysts peg AVGO stock as a consensus “strong buy.” This assessment breaks down to 14 “buy” ratings and three “hold” ratings. Analysts also give Broadcom a consensus price target of $702.50, implying almost 2% upside potential.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.