What Are The Drivers of Broadcom’s Stock Surge?
While Broadcom Inc. (NASDAQ: AVGO) has experienced a roughly 4% year-to-date decline, mirroring a broader downturn in the NASDAQ index influenced by uncertain macroeconomic conditions like ongoing tariffs and trade tensions, some of these concerns have recently eased. The landmark U.S. and U.K. trade agreement and the recent 90-day pause in high tariffs between the U.S. and China suggest a potential shift in this landscape.
Despite this recent dip, AVGO stock has delivered substantial long-term growth, soaring over 300% since early 2023. This impressive performance can be primarily attributed to the following factors:
- A significant 190% increase in the company’s price-to-earnings (P/E) ratio, rising from 14 in 2022 to the current 41.
- A substantial 61% growth in the company’s adjusted net income, increasing from $16 billion to $26 billion; partially offsetting these positive drivers is:
- A 14% increase in the total number of outstanding shares, now at 4.8 billion.
We’ll delve into the specifics of these factors. While AVGO stock has had a great run, if you want an 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.
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AI and VMware: Powering Broadcom’s Revenue Surge
Broadcom’s exceptional recent performance is largely attributable to two key factors: its burgeoning AI product line and the strategic acquisition of VMware in 2023. This synergy has fueled a significant 64% increase in Broadcom’s revenue, rising from $33 billion in 2022 to $55 billion over the last twelve months.
A major contributor to this growth is the company’s AI revenue, which reached $12.2 billion in fiscal year 2024, demonstrating an impressive 220% year-over-year increase. This surge in AI revenue is driven by strong market demand for Broadcom’s custom AI accelerators (XPUs) and its Ethernet products.
Through its comprehensive suite of networking and storage solutions, cybersecurity offerings, and semiconductor products, Broadcom has strategically positioned itself to effectively capitalize on the ongoing generative AI boom.
What’s Driving Broadcom’s Profits?
Broadcom has consistently maintained an adjusted net margin exceeding 45% in recent years. This strong recent profitability stems from its strategic embrace of the burgeoning AI market, particularly through high-demand custom AI accelerators and networking solutions. The transformative acquisition of VMware has further boosted revenue and margins by adding a significant infrastructure software component with a shift toward recurring subscriptions. Coupled with continued strength in their core semiconductor business and a consistent focus on operational efficiency and robust cash flow generation, these factors have positioned Broadcom for sustained financial success.
What’s Behind The 3x Rise In Valuation Multiple?
Broadcom’s custom AI accelerators (XPUs) have been a critical driver of the company’s financial transformation and a significant factor in its enhanced overall valuation. This impact is evident in Broadcom’s adjusted price-to-earnings (P/E) ratio, which dramatically expanded threefold, from 14x in 2022 to 41x currently. This surge in investor optimism was fueled by the company’s improved financial performance, characterized by strong sales growth and increased profitability.
This financial evolution occurred against a backdrop of a challenging market environment, notably the inflation shock of 2022 that triggered a significant stock market correction. During this turbulent period, AVGO stock experienced a sharp 36% decline from its January 2022 high of $67 to a low of $43 by October 2022. This downturn was more pronounced than the S&P 500’s 25.4% peak-to-trough decline. AVGO’s recovery was gradual, taking until May 2023 to fully return to its pre-crisis peak, highlighting both the difficult market conditions and the company’s underlying resilience.
But What Next? Is AVGO Stock A Buy At $220?
Currently trading at $220, Broadcom’s stock has a price-to-earnings (P/E) ratio of 41, based on its trailing adjusted earnings per share of $5.36. This multiple is not cheap, and it’s notably higher than the stock’s three-year average P/E ratio of approximately 30x. However, this premium valuation appears justified by the company’s significant opportunities within the rapidly expanding AI sector.
These AI-driven advancements are expected to aid sales growth. While the company has achieved an average sales growth rate of 24% over the past three years, projections for the next three years anticipate mid-teens average growth. Importantly, bottom-line growth is expected to be even more substantial than the revenue increase.
For long-term investors, any pullback in AVGO stock may represent an opportunity, given the company’s strong fundamentals and positioning in the AI market. However, those concerned about near-term volatility should consider appropriate strategies, such as the Trefis High Quality (HQ) Portfolio strategy, with a collection of 30 stocks, which has a track record of comfortably outperforming the S&P 500 over the last four-year 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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