Along with its solid second-quarter 2024 results, Broadcom Inc. (AVGO) announced a ten-for-one forward stock split (the first in the company’s history), with the stock beginning trading on a split-adjusted basis on July 15. Shareholders of record as of July 11 will receive nine additional shares of each stock owned after the market closes on July 12.

The company’s CFO, Kirsten Spears, stated the stock split is being executed to “make ownership of Broadcom stock more accessible to investors and employees.” This strategic move reflects Broadcom’s ongoing efforts to enhance the accessibility and liquidity of its shares by increasing trading activity, potentially opening up opportunities for a broader investor base.

Notably, a stock split just increases the number of outstanding shares while proportionally reducing the nominal price per share; however, it does not change the company's fundamental value or the individual investor’s total ownership stake.

Robust AI demand and VMware drove the company’s stellar second-quarter performance, surpassing analysts’ estimates on both top and bottom lines. AVGO’s reported net revenue of $12.49 billion, exceeding the consensus estimate of $12.01 billion. Revenue from its AI products was a record $3.10 billion during the quarter.

Furthermore, the company’s non-GAAP net income per share came in at $10.96, beating the analysts’ expectations of $10.84.

Broadcom expressed confidence in the company’s growth prospects by increasing its fiscal year 2024 guidance. AVGO expects full-year revenue of nearly $51 billion. Its adjusted EBITDA is expected to be approximately 61% of projected revenue.

Moreover, AVGO’s solid financial health and commitment to delivering value to shareholders enabled it to approve a quarterly dividend of $5.25 per share, payable on June 28, 2024. The company pays an annual dividend of $21 per share, which translates to a yield of 1.17% on the current share price, while its four-year average dividend yield is 2.69%.

AVGO’s dividend payouts have grown at CAGRs of 12.9% and 17.5% over the past three and five years, respectively. Broadcom also raised its dividend for 13 consecutive years.

Shares of AVGO have surged 53.2% over the past six months and 96% over the past year to close the last trading session at $1,734.56. Moreover, the stock is up 22% over the past month.

Let’s look at factors that could influence AVGO’s performance in the upcoming months.

Solid Financials

For the second quarter that ended on May 5, 2024, AVGO’s net revenue increased 43% year-over-year to $12.49 billion. It reported triple-digit revenue growth in the Infrastructure Software segment to $5.29 billion as enterprises increasingly adopted the VMware software stack to build their private clouds.

AVGO’s gross margin rose 27.2% year-over-year to $7.78 billion. Its non-GAAP operating income rose 32% year-over-year to $7.15 billion. Furthermore, 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.

Additionally, the company’s adjusted EBITDA grew 30.6% from the year-ago value to $7.43 billion. It reported a free cash flow of $4.45 billion for the quarter. As of May 5, 2024, AVGO’s cash and cash equivalents were $9.81 billion.

Favorable Analyst Expectations

Analysts expect AVGO’s revenue for the third quarter (ending July 2024) to grow 45.6% year-over-year to $12.92 billion. The consensus EPS estimate of $12.11 for the current quarter indicates a 14.9% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year ending October 2024, Street expects Broadcom’s revenue and EPS to grow 43.4% and 13% year-over-year to $43.37 billion and $47.74, respectively. In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 15.3% and 25.6% from the previous year to $59.22 billion and $59.95, respectively.

Solid Profitability

AVGO’s trailing-12-month gross profit margin of 74.24% is 50.6% higher than the 49.31% industry average. The stock’s trailing-12-month EBIT margin of 34.41% is 622.8% higher than the 4.79% industry average. Similarly, its trailing-12-month net income margin of 24.10% is significantly higher than the 2.83% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 22.23%, 8.93%, and 5.86% favorably compared to the industry averages of 4.22%, 2.73%, and 1.63%, respectively. Its trailing-12-month levered FCF margin of 47.45% is 370.5% higher than the industry average of 10.08%.

Elevated Valuation

In terms of forward non-GAAP P/E, AVGO is trading at 37.76x, 58.8% higher than the industry average of 23.78x. Likewise, the stock’s forward EV/Sales and EV/EBITDA of 17.59x and 28.69x are significantly higher than the respective industry averages of 2.94x and 14.50x.

Further, the stock’s forward Price/Sales of 16.34x is 470% higher than the industry average of 2.87x. Its forward Price/Book multiple of 11.23 is 189.9% higher than the industry average of 3.87.

POWR Ratings Reflect Uncertainty

AVGO’s mixed fundamentals are 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 has an A grade for Sentiment, in sync with its favorable analyst estimates. Also, the stock has a B grade for Quality, consistent with its higher-than-industry profitability.

Further, AVGO has a grade C for Stability, justified by its 24-month beta of 1.43. On the other hand, the stock has a D grade for Value, in sync with its higher valuation relative to its peers.

Within the Semiconductor & Wireless Chip industry, AVGO is ranked #49 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

AVGO, a global leader that develops and supplies semiconductor and infrastructure software solutions, surpassed analyst estimates on the top and bottom lines in the last reported quarter. The company’s outstanding second-quarter performance was driven by solid AI demand and VMware. Broadcom also raised its fiscal year 2024 guidance for revenue and adjusted EBITDA.

In its quarterly earnings release, Broadcom announced its first-ever ten-for-one stock split, effective July 15, to make shares more affordable and accessible to a wide range of investors by reducing the nominal share price. Its upcoming stock split represents a proactive step to enhance shareholder value and broaden investor participation.

However, AVGO’s stock is currently trading at a premium valuation. So, waiting for a better entry point in this stock seems wise now.

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

Given its near-term uncertain prospects, the odds of AVGO outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A (Strong Buy) or B (Buy) stocks from the Semiconductor & Wireless Chip industry instead:

Cirrus Logic, Inc. (CRUS)

Amkor Technology, Inc. (AMKR)

Applied Materials Inc. (AMAT)

To explore more A and B-rated chip stocks, click here.

What To Do Next?

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AVGO shares were trading at $1,696.57 per share on Friday afternoon, down $37.99 (-2.19%). Year-to-date, AVGO has gained 52.64%, versus a 15.07% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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