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Proprietary Data Insights Financial Pros’ Top Semiconductor Stock Searches in the Last Month
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Should You Hold Broadcom (AVGO)?
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Move over Nvidia (NVDA), shares of Broadcom (AVGO) are now the talk of the town. With Q2 results that blew away revenue and earnings estimates, shares of the stock soared +25% in less than a week. The 10-for-1 split coming on July 12 played a big part. AI and networking make up a lot of that growth. By the end of 2024, those segments will still only be around 20% of the company’s revenues. A lot of financial pros have begun searching for Broadcom along with AI terms according to our TrackStar data… …which makes us wonder whether Broadcom is the next big AI play. Broadcom’s Business Broadcom Inc. is renowned for its extensive semiconductor and infrastructure software solutions portfolio. The company has solidified its position as a trailblazer with an impressive arsenal of 26 category-leading divisions and an unwavering commitment to innovation. R&D investments of $5.3 billion in fiscal year 2023 underscore its dedication to pushing the boundaries of technological advancement. Broadcom’s diverse product offerings find applications in various sectors, from data center networking, and home connectivity to telecommunications, smartphones, factory automation, and electronic displays. The company’s cutting-edge infrastructure software solutions empower customers to develop, run, manage, and secure intricate software environments across various platforms, including mainframe, distributed, mobile, and cloud. Broadcom’s business is strategically divided into two main segments:
Source: Broadcom Q2, 2024 Investor Presentation In its Q2 FY2024 quarterly report, Broadcom delivered impressive results, with net revenue surging 43% year-over-year to reach $12.5 billion. The company also made headlines with the announcement of a definitive agreement to divest VMware’s end-user computing business for approximately $3.8 billion, a transaction set to be finalized in calendar year 2024, subject to customary closing conditions. Moreover, Broadcom recently executed a ten-for-one stock split, making its shares more accessible to a wider spectrum of investors and cementing its position as a key player in the tech industry. The company’s specialized AI chips accelerate performance in data centers and cloud computing environments. Its industry-leading Tomahawk® 5 switch series, optimized for AI and machine learning workloads, offers unparalleled bandwidth and scalability. Major hyperscalers and data center operators leverage Broadcom’s AI-optimized chips to power advanced applications like natural language processing, image recognition, and predictive analytics. By enabling faster data processing and reduced latency, Broadcom’s AI chip innovations are unlocking new possibilities for businesses to extract valuable insights, automate complex tasks, and deliver enhanced user experiences. Financials
Source: Stock Analysis Like many semiconductor companies, Broadcom’s revenues jumped in recent years as demand for its AI chips exploded. This helped improve gross margins by nearly 10% while operating and profit margins doubled. Cash from operations more than doubled from $8.9 billion in 2018 to 2023 to $18.9 billion in the last 12 months. At the same time, management kept their 35% CAGR on the dividend as well as adding $12.6 billion in share buybacks in the past year for a total yield of roughly 2.5%. The only balance sheet problem is the total debt which stands at $74 billion, a massive jump from the $39.7 billion last year thanks to the acquisition of VMWare and well above the $17.5 billion in 2018. Management plans to repay $2.0 billion of its 6.6% interest rate floating rate debt per quarter through 2024. Valuation
Source: Seeking Alpha Broadcom is in the middle of the pack compared to other semiconductor companies. Its P/E ratio at ~40x is above Taiwan Semiconductor (TSM) and Qualcomm (QCOM) but well below Nvidia (NVDA) and Advanced Micro Devices (AMD). Price to cash flow is in that same middle area, which should improve as VMware integrates into the company. Growth
Source: Seeking Alpha Broadcom has no problem growing its business and predicts it will keep doing so in 2024 with a +20% growth rate, above its three- and five-year average. Free cash flow percentage is the lowest of the group. However, that will expand as high interest debt is repaid. Profitability
Source: Seeking Alpha Broadcom’s overall profitability puts it near the top, though it could do with a higher EBIT and net income margin. It also has one of the lowest returns on total capital, which, again, should improve as VMware expands within the company.
Our Opinion 7/10 We like the overall value the company presents. The positive growth outlook and the addition of VMware give it a boost and niche its peers lack. We’re also a big fan of the massive cash generation and shareholder-friendly dividends and buybacks. Although the stock’s price is stretched, Broadcom is a nicely balanced growth stock for a portfolio with a long-term focus. |
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