Broadcom Inc. (AVGO) unveiled its second-quarter results on Wednesday, June 12. Thanks to the escalating demand for its AI products, the company delivered a better-than-expected earnings report with double-digit top-line growth, comfortably surpassing Wall Street’s estimates. As a result, its shares rallied nearly 12% in its share price post earnings.

In this article, we gauge the prospects of this semiconductor giant to determine whether the stock deserves a spot in your portfolio or not.

The demand for AVGO’s products, essential for building Data Centers, has soared due to the extensive adoption of AI-powered applications, particularly within the enterprise sector. The semiconductor division is the cornerstone of the company’s business, contributing 58% of its total revenue, while the remaining 42% falls into the industrial software segment.

AVGO, along with its semiconductor peers, is making massive investments in its product lineup to cater to the increasing needs of artificial intelligence applications. The current frenzy for AI chips, fueled by significant investments in large language models, has significantly boosted the company’s topline growth.

For the second quarter that ended on May 5, 2024, AVGO’s net revenue increased 43% year-over-year to $12.49 billion, with triple-digit revenue growth in the Infrastructure Software segment to $5.29 billion. Its revenues exceeded the analysts’ estimate of $12.01 billion by 3.9%.

AVGO’s gross margin grew 27.2% from the year-ago value to $7.78 billion, while its non-GAAP operating income came in at $7.15 billion, up 32% year-over-year. On top of it, the company’s non-GAAP net income came in at $5.39 billion or $10.96 per share, up 20.2% and 6.2% year-over-year, respectively. Also, its adjusted EBITDA increased 30.6% from the prior year’s quarter to $7.43 billion.

The company’s robust free cash flow of $4.45 billion enabled it to approve a quarterly dividend of $5.25 per share, payable on June 28, 2024. With 13 consecutive years of dividend growth, AVGO stands out among semiconductor-focused enterprises due to its consistent and significant cash flow distributions to shareholders.

The company pays an annual dividend of $21 per share, yielding 1.25% on the current share price, with a four-year dividend yield of 2.70%. Over the past three and five years, its dividend payouts have grown at CAGRs of 12.9% and 17.5%, respectively.

When it comes to price performance, shares of AVGO have soared 97.3% over the past year and returned 50.4% year-to-date to close the last trading session at $1,678.99.

While the high share price might deter some investors, the company has addressed this concern by announcing a 10-for-1 stock split, effective July 15, 2024. This move is expected to enhance share affordability and liquidity, potentially attracting a broader investor base.

In view of the above, is it worth investing? Let’s take a deeper look at its fundamental factors:

Favorable Analyst Estimates

The consensus revenue estimate of $12.91 billion for the fiscal third quarter (ending July 2024) represents a 45.5% increase year-over-year. The consensus EPS estimate of $12.10 for the current quarter indicates a 14.8% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue estimates in each of the trailing four quarters.

Additionally, AVGO’s revenue and EPS for the current year (ending October 2024) are expected to grow 43.4% and 13.2% year-over-year to $51.36 billion and $47.85, respectively.

Robust Profitability

AVGO’s trailing-12-month 74.24% gross profit margin is 49.9% higher than the 49.52% industry average. Similarly, its trailing-12-month EBIT and net income margins of 39.51% and 29.93% are substantially higher than the industry averages of 4.66% and 2.88%, respectively. Moreover, the stock’s trailing-12-month 9.19% ROTC is 233.9% higher than the industry average of 2.75%.

Stretched Valuation

In terms of forward non-GAAP P/E, AVGO is trading at 34.94x, 46.2% higher than the industry average of 23.90x. Its forward EV/EBITDA and EV/EBIT of 26.81x and 27.97x are 82.8% and 34.6% higher than the respective industry averages of 14.67x and 20.78x. Furthermore, the stock’s forward Price/Sales multiple of 15.23 compares with the industry average of 2.93.

POWR Ratings Exhibit Uncertain Prospects

AVGO’s outlook is reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AVGO boasts a B grade for Sentiment and Quality, justified by its optimistic analyst estimates and higher-than-industry profitability. Plus, with a five-year beta of 1.18, the stock has a grade C for Stability.

On the other hand, AVGO has a D grade for Value, which is in sync with its stretched valuation.

Within the D-rated Semiconductor & Wireless Chip industry, AVGO is ranked #46 out of 92 stocks. Beyond what I have stated above, we have also given AVGO grades for Growth and Momentum. Get all AVGO ratings here.

Bottom Line

With accelerating revenue, robust profit margins, and significant exposure to the AI chip industry, AVGO has garnered immense investor interest. This fervor, driven by a fear of missing out on the company’s AI potential, has led the semiconductor firm's share price to trade well above industry standards. Regardless of the earnings beat, the stock’s current valuation is exceedingly high.

Although investors cheered the announcement of a 10-for-1 stock split, it won’t make the shares cheaper but could make the stock more accessible to a broader range of investors in the near term.

Hence, given the lofty valuation levels, investors may be prudent to await a more opportune entry point into the stock.

How Does Broadcom Inc. (AVGO) Stack Up Against Its Peers?

While AVGO has an overall grade of C, equating to a Neutral rating, you may also check out these other stocks within the Semiconductor & Wireless Chip industry: Cirrus Logic, Inc. (CRUS), ChipMOS TECHNOLOGIES INC. (IMOS), and Tower Semiconductor Ltd. (TSEM), with an A (Strong Buy) or B (Buy) rating. To explore more Semiconductor & Wireless Chip stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AVGO shares were trading at $1,739.24 per share on Friday afternoon, up $60.25 (+3.59%). Year-to-date, AVGO has gained 56.47%, versus a 14.37% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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