Up 2.5x from its low in March 2020, at the current price of $480 per share, we believe Broadcom Inc. stock (NASDAQ: AVGO) has further upside potential. Broadcom stock rose from $190 in March 2020 to $480 currently, much more than the S&P, which increased by around 95% from its lows. Further, the stock is up 1.5x from the level it was at before the pandemic. However, we believe that Broadcom stock could rise almost 15% to fresh highs above $550, driven by expectations of steady, continuing demand growth and strong Q2 2021 results. Our dashboard What Factors Drove 89% Change In Broadcom Stock Between 2018 And Now? has the underlying numbers behind our thinking.
Broadcom is a designer and manufacturer of semiconductor and infrastructure software products, used in applications such as data center, networking, broadband, and wireless. Broadcom’s stock price rise since 2018-end came due to an 18% rise in revenue from $20.8 billion in FY 2018 to $24.7 billion over the last 12 months (Broadcom’s fiscal year ends in October). Combined with a roughly unchanged outstanding share count, RPS (revenue-per-share) jumped from $48.60 to $57.30 over this period.
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Meanwhile, Broadcom’s P/S (price-to-sales) multiple rose from 5.1x at 2018-end to 8.4x currently, as demand for the company’s products has risen. However, we believe that the company’s P/S ratio has the potential to increase more in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus, and the resulting lockdowns and quarantine had initially led to a drop in semiconductor demand across a variety of industries. However, demand has since recovered and this is evident from Broadcom’s Q2 2021 earnings, where revenue came in at $5 billion, up from $4.25 billion in Q2 2020. Further, COGS and operating expenses dropped over this period, causing operating income to surge from $766 million to $1.98 billion. This helped drive EPS up from $1.23 to $3.46 over this period.
Further, with the lockdowns being lifted globally and semiconductor demand continuing to rise, especially from the 5G sector, we believe the company will continue seeing strong revenue growth in the medium term. Additionally, if Broadcom continues to successfully control expenses, profitability could rise even further in the near to medium term. This will raise investor expectations, driving up the company’s P/S multiple. We believe that Broadcom stock can rise almost 15% from current levels, to new levels above $550.
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