Broadcom Inc. (AVGO) strategic acquisitions and collaborations with industry leaders are undoubtedly laying a solid foundation for significant long-term growth. However, with earnings on the horizon, would it be prudent to invest in AVGO stock now? Let’s explore whether the company’s fundamentals support this potential….
Broadcom Inc. (AVGO) will report its fiscal 2024 first-quarter earnings on March 7. Forecasts call for revenue to increase 31.8% year over year to $11.75 billion. Additionally, analysts expect the company’s EPS to increase slightly from the same period last year to $10.39.
AVGO’s acquisition of VMware, completed on November 22, 2023, marks a significant step toward strengthening investments in VMware Cloud Foundation. With VMware’s robust suite of services, including Tanzu for application delivery acceleration, AVGO is poised to strengthen its cloud and edge offerings, meeting modernization needs.
Hock Tan, President and CEO of AVGO, highlighted the transformational impact of the acquisition during the latest earnings release. He said: “The acquisition of VMware is transformative. In fiscal 2024 we expect semiconductors to maintain its mid-to-high single-digit revenue growth rate, with VMware’s contribution bringing consolidated revenues to $50 billion dollars and adjusted EBITDA at $30 billion.”
Additionally, the joint verification by SoftBank, NEC Corporation and VMware, under AVGO ownership, validates Radio Access Network (RAN) virtualization, enabling the transition from traditional RAN systems to vRAN systems. The transition simplifies network operations, improving efficiency and scalability, in line with AVGO’s strategic goals for intelligent and efficient operations.
By adopting the O-RAN architecture and optimizing for Telco Cloud, AVGO will benefit from open and unified operations across the entire network lifecycle. This approach is expected to improve operational efficiency and offer scalability and flexibility, further cementing AVGO’s position as a leader in providing innovative telecommunications infrastructure solutions.
AVGO shares have gained 60.8% over the past six months and 121.6% over the past year, closing the latest trading session at $1,402.26.
Here are the financial aspects of AVGO that could influence its price performance in the near term:
Healthy financials
During the fourth quarter of fiscal 2023, ended October 29, 2023, AVGO’s non-GAAP net revenues increased 4.1% year-over-year to $9.30 billion. Its adjusted EBITDA grew 5.7% from a year ago to $6.05 billion.
Additionally, the company’s non-GAAP net income and non-GAAP earnings per common share increased 5.9% and 5.8% from the prior-year period, to $4.81 billion and 11, respectively. $.06.
Mixed growth record
Over the past three years, AVGO’s revenue and EBITDA have increased at a CAGR of 14.5% and 21.5%, respectively. Its net profit and EPS grew at respective CAGRs of 68.2% and 73.4% during the period. However, over the same time frame, the company’s total assets declined at a CAGR of 1.4%.
Optimistic analysts’ estimates
The consensus revenue estimate for the fiscal year ending in October 2024 is $49.84 billion, signaling a 39.1% year-over-year increase. Likewise, the company’s EPS is expected to see an increase of 10.6% from the previous year to $46.72.
Looking ahead, analysts expect an 11% increase in revenue for the fiscal year ending in October 2025, with projections reaching $55.34 billion. Likewise, EPS for the next year is expected to register a growth of 19.6% compared to the previous year, coming in at $55.90.
Robust profitability
The stock’s trailing 12-month gross profit margin and trailing 12-month EBITDA margin of 74.11% and 56.40% are 51.6% and 494.3% higher than industry averages of 48, 87% and 9.49%, respectively.
Additionally, the company’s trailing 12-month leveraged FCF margin of 37.56% is 315.9% higher than the industry average of 9.03%. Likewise, the trailing 12-month net income margin of 39.31% compares to the industry average of 2.56%.
Elongated evaluation
In terms of forward non-GAAP P/E, AVGO trades at 29.86x, 18.3% higher than the industry average of 25.24x. Its forecast EV/sales of 13.52x is 361.2% higher than the industry average of 2.93x.
Additionally, the stock’s forward EV/EBITDA and forward price/sales of 22.64x and 13.01x are 46.6% and 336.1% higher than the industry average of 15.45x and 2.98x , respectively.
POWR ratings show mixed outlooks
AVGO’s prospects are evident in its POWR ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. POWR Ratings are calculated by taking into account 118 different factors, each optimally weighted.
Our proprietary rating system also evaluates each security based on eight distinct categories. AVGO’s A quality grade highlights its solid profitability, reflecting positively on its financial health. However, the stock has a C Stability grade, which reflects its 24-month beta of 1.21, suggesting some degree of volatility in the stock’s performance.
Additionally, AVGO holds a D grade for value, which is in line with its high valuation compared to industry peers. The stock is ranked 22nd out of 90 stocks in the Semiconductor & Wireless Chips industry. Click here to access AVGO’s growth, momentum and sentiment ratings.
Bottom line
AVGO’s acquisition of VMware and partnerships with industry giants like SoftBank and NEC highlight its dedication to advancing network infrastructure technology. These strategic initiatives enable AVGO to offer holistic solutions, meeting the dynamic demands of the telecommunications industry and driving market growth and competitiveness.
Despite such promising long-term prospects, the company’s current valuation, above industry standards, combined with instability, suggests that waiting for a better entry point into AVGO could be advantageous.
How does Broadcom Inc. (AVGO) compare to its competitors?
While AVGO has an overall grade of C, equivalent to a Neutral rating, you can take a look at these A (Strong Buy) and B (Buy) rated stocks in the Semiconductor & Wireless Chips industry: QUALCOMM Incorporated (QCOM), ChipMOS TECHNOLOGIES INC. (IMOS) and Everspin Technologies, Inc. (MRAM). To explore more semiconductor and wireless chip stocks, click here.
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AVGO shares were unchanged in premarket trading Tuesday. Year to date, AVGO has gained 25.62%, compared to a 7.78% gain in the benchmark S&P 500 index over the same period.
About the author: Aanchal Sugandh
Aanchal’s passion for financial markets drives his work as an investment analyst and journalist. He earned his bachelor’s degree in finance and is pursuing the CFA program. He is adept at evaluating the long-term prospects of stocks with his fundamental analysis skills. His goal is to help investors build portfolios with sustainable returns.
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