Broadcom Inc. (AVGO)

Equity
US
Technology

RISK

RETURN

Key risk factors

Low price volatility

Good trading liquidity

Resilient to price shocks

Key return factors

Strong growth

Strong margins and returns

Favourable price performance

Company profileBroadcom Inc. designs, develops, and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide. The company operates in two segments, Semiconductor Solutions and Infrastructure Software. It provides set-top box system-on-chips (SoCs); cable, digital subscriber line, and passive optical networking central office/consumer premise equipment SoCs; wireless local area network access point SoCs; Ethernet switching and routing merchant silicon products; embedded processors and controllers; serializer/deserializer application specific integrated circuits; optical and copper, and physical layers; and fiber optic transmitter and receiver components. The company also offers RF front end modules, filters, and power amplifiers; Wi-Fi, Bluetooth, and global positioning system/global navigation satellite system SoCs; custom touch controllers; serial attached small computer system interface, and redundant array of independent disks controllers and adapters; peripheral component interconnect express switches; fiber channel host bus adapters; read channel based SoCs; custom flash controllers; preamplifiers; and optocouplers, industrial fiber optics, and motion control encoders and subsystems. Its products are used in various applications, including enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom Inc. was incorporated in 2018 and is headquartered in San Jose, California.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

54.70

67.80

PEG

4.40

P/B

9.10

8.20

P/S

16.80

13.00

P/FCF

35.50

32.90

EV/EBITDA

34.70

27.20

Considering past and projected metrics, the stock is distinctly 'expensive' compared to its peers. Specifically, the stock is expensive' on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Favourable

Over the past six months, the stock has consistently climbed, resulting in 44% total increase. When compared to its international counterparts in the same sector and industry (as shown above), the stock has exceeded their performances, leading by 40ppts in total. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is favourable. This generally signifies that a stock is fairly valued or marginally undervalued abd is becoming more 'expensive', suggesting a short-term spike in confidence by the market at large.

Analyst view: Somewhat favourable

The average target price is 1469 and suggests 4% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 1720.0. This translates into 22% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 1110.0. This is equivalent to 21% downside potential in the worst case.

Profitability: Strong

RoE

Broadcom Inc. reported a return on equity (RoE) of 16.3% in the last 12 months, down from 24.5% in FY23. The market consensus projects an RoE of 11.1% in FY24, however, this time below its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 6.4% in the last 12 months, a decrease from 9.1% in FY23. The market analysts predict that RoA will be 4.4% in FY24, again weaker than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 7.3%, below the peers. The consensus estimate for FY24 for RoCE is 6.8%, again behind the peers.

Net margin

EBITDA margin

Historically, AVGO has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 29.4%, down from 37.2% in FY22. The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 53.1% in the last 12 months, a decline from 58.4% in FY22.

RoIC / WACC = 1.2(average value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.2 in the past several years. This ratio implies a average shareholder value creation.

Growth: Strong

Revenue

EBITDA

EPS

Free cash flow

AVGO reported revenue of USD 38 865mn in the last 12 months, up 13% from FY22. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS fell 9% from FY22 to USD 27.85. Market expects EPS to reach USD 19.07934 in FY24.Revenue growth has been moderate in the past several years (positive-to-neutral), while EBITDA growth has been steady. This all contributed to very fast EPS growth (strongly positive). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of EPS. On the positive side, revenue dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been moderate and on par with its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note robust profitability, solid return on capital, adequate interest coverage, and solid cash flow generation, among the positive credit factors. Among the negative credit factors, we point to excessive margin volatility, poor working capital management, and an unfavourable capital structure.

Volatility: Low

In normal market circumstances, AVGO is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will remain relatively stable. The stock's losses on its worst days (less than 1-5% of the time) will range from low to minimal. We would also like to highlight the minimal intraday volatility of the instrument.

Stress-test: Resilient

In highly turbulent market conditions, AVGO is not overly volatile. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low.

Selling difficulty: Low

AVGO boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and is average on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.