Will Broadcom Stock Continue To See Higher Levels?

Broadcom Inc. (NASDAQ: AVGO), a semiconductor, enterprise software, and security solutions provider, has seen its stock surge over 40% in a week. This can be attributed to better than expected earnings and outlook, followed by stock upgrades from some of the large Wall Street institutions.

Broadcom recently reported its Q4 fiscal 2024 results (fiscal ends in October), with revenues of $14.05 billion and earnings of $1.42 per share, versus the consensus estimates of $14.09 billion and $1.38, respectively. Broadcom is seeing a stellar demand for its AI products, a trend expected to continue in the coming years. Let’s dive deeper into the company’s recent performance and the impact on its stock price. Separately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Broadcom’s revenue of 14.05 billion in Q4 was up a stellar 51% y-o-y. This can partly be attributed to the contribution from VMware, which it acquired for $69 billion last year. Apart from VMware, Broadcom’s AI products contributed to its top-line growth. The company’s AI revenue in fiscal 2024 stood at $12.2 billion, reflecting a whopping 220% y-o-y growth, driven by strong demand for its AI XPUs (Broadcom’s custom AI accelerators) and Ethernet products. Broadcom is benefiting from the generative AI boom, with its wide suite of networking and storage solutions, cybersecurity, and semiconductor offerings.

Broadcom also announced that it’s developing AI chips with three large cloud companies, which reportedly include Google and Meta. The company’s outlook of $14.6 billion in Q1 fiscal 2025 also reflects a strong 22% y-o-y growth. Not only did the company post strong revenues in Q4, its adjusted operating margin expanded 90 bps y-o-y to 62.7%. Higher revenues and margin expansion resulted in the bottom line of $1.42 on an adjusted basis, versus $1.11 in the prior-year quarter.

What Does This Mean For AVGO Stock?

Admirably, AVGO stock has generated better returns than the broader market in each of the last 4 years. Returns for the stock were 56% in 2021, -13% in 2022, 104% in 2023, and 104% so far this year.  Similarly, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Broadcom’s solid growth for its AI products and guidance prompted an upward revision for its stock price by several Wall Street analysts. That said, most of the estimates are now met, after a large 40% move seen in a week. At its current levels of $250, AVGO stock now trades at 23x trailing revenues, versus the stock’s average P/S ratio of 5x over the last three years. Now, the company’s acquisition of VMware, the massive opportunity in generative AI with its chips, as well as networking products, and strong profitability does warrant a meaningful upward revision in valuation multiple. After its recent rally, AVGO has now become the eighth stock to exceed the $1 trillion market capitalization. Notably, the $226 average of analysts price estimate for AVGO stock implies that it’s now fully valued.

While AVGO stock looks like it is fully valued, it is helpful to see how Broadcom’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

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