Will Broadcom Stock Continue To See Higher Levels After A 35% Rise This Year?

AVGO: Broadcom logo
AVGO
Broadcom

Broadcom Inc. (NASDAQ: AVGO), a semiconductor, enterprise software, and security solutions provider, has seen its stock rise over 35% this year, aligning with the growth seen by its peer – Lam Research (NASDAQ: LRCX). Broadcom recently reported its Q2 fiscal 2024 results (fiscal ends in October), with revenues and earnings exceeding the street estimates. The company reported revenue of $12.5 billion and earnings of $10.96 per share, compared to the consensus estimates of $12.0 billion and $10.84, respectively. The company’s outlook for 2025 was also slightly better than expectations, with sales expected to rise 42% to $51 billion and EBITDA to be 61% of sales. The company also declared a ten-for-one forward stock split to be completed next month. An upbeat earnings and outlook, and a stock split, will likely bode well with investors. AVGO stock is up 12% in after-market hours on June 13. In this note, we discuss Broadcom’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Broadcom’s stock performance in recent years. AVGO stock has seen extremely strong gains of 240% from levels of $440 in early January 2021 to around $1495 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. Admirably, AVGO stock has outperformed the broader market in each of the last 3 years. Returns for the stock were 52% in 2021, -16% in 2022, and 100% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, AAPL, and ORCL, and even for the megacap stars GOOG, TSLA, and AMZN.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AVGO see a strong jump? We think AVGO stock is appropriately priced, trading at 15x trailing revenues, compared to the 11x average seen over the last three years. However, the stock may see higher levels in the near-term, reacting to its solid Q2 performance.

Broadcom’s revenue of 12.5 billion in Q2 was up 43% y-o-y. This can 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 adjusted operating margin contracted over 450 bps to 57.2%, primarily due to a 2x rise in R&D and SG&A expenses after the VMware acquisition. The company’s adjusted earnings of $10.96 per share were up 6.2% y-o-y.

Overall, we think that Broadcom stock will see higher levels after its strong Q2 and full-year guidance. The stock split announcement should also bode well for AVGO stock. Although splits don’t change the fundamentals of a company, they often cause a run-up in the stock price post-announcement, primarily due to the stock becoming more accessible to smaller investors, driving up demand for the shares.

While AVGO stock looks like it may see higher levels in the near term, 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.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 AVGO Return 13% 34% 746%
 S&P 500 Return 3% 14% 142%
 Trefis Reinforced Value Portfolio 3% 7% 660%

[1] Returns as of 6/13/2024
[2] Cumulative total returns since the end of 2016

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