Broadcom Stock: Overvalued Relative to Its Historical Multiples

Broadcom Inc. (AVGO), also known as simply Broadcom, is a giant in the tech industry. It is primarily known for infrastructure software solutions and supplying semiconductors. The company was founded in 1961 and is headquartered in San Jose, California.

It has a long history and was first started as one of the product divisions of the information technology giant Hewlett-Packard. After other acquisitions, it became Avago Technologies. In 2015, it acquired Broadcom Corporation. Today, it’s known as Broadcom Inc. and has several other companies under its belt.

I am neutral on Broadcom as it has strong growth momentum, enjoys overwhelming support from Wall Street analysts, and its average price target implies strong upside potential over the next twelve months. However, shares look expensive relative to historical averages.

Strengths

One of Broadcom’s biggest strengths at the moment is the skyrocketing global demand for semiconductors. As a large-scale supplier, designer, and developer, Broadcom is in a prime position to see significant growth. This is especially important since various industries use semiconductors, including data centers, enterprise software, broadband, industrial and storage, networking, and broadband.

The company’s offerings also include different solutions, including networking and storage, mainframe and cyber security software, monitoring and security, telecoms, and more.

Recent Results

All of Broadcom’s strengths are reflected in its Q4 results for the Fiscal Year 2021. The company’s revenue increased by 15% from the previous year and reached a total of $7.41 billion for Q4 alone. GAAP net income was almost $2 billion, and GAAP diluted EPS was $4.45 for Q4. As such, the stock dividend was raised 14% to $4.10 per share.

Q4 also saw a significant increase in cash and cash equivalents. These totaled $12.16 billion at the end of Q4, compared to a total of $11.1 billion at the end of Q3.

Valuation Metrics

AVGO stock looks overvalued here as it trades above its three-year average valuation multiple averages on a forward EV/EBITDA ratio and a forward price-to-normalized-earnings basis. Its forward EV/EBITDA ratio is 14.2 times compared to its historical average of 12.5 times, and its forward price-to-normalized-earnings ratio is 17.5 times compared to its historical average of 14.8 times.

Moving forward, analysts expect EBITDA to increase by 13.8% and normalized earnings per share to increase by 18.2% over the next twelve months.

Wall Street’s Take

According to Wall Street analysts, AVGO stock comes in as a Strong Buy based on 20 Buys, three Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Broadcom price target of $686.00 puts the upside potential at 19.7%.

Summary and Conclusions

AVGO stock enjoys substantial backing from Wall Street, as analysts are nearly overwhelmingly bullish on it, and the average price target implies substantial upside could be in order over the next year. Furthermore, it operates in a high-growth industry, which gives the business significant momentum.

That said, the stock is trading at a substantial premium to its historical averages based on several valuation metrics, and the company does operate in a traditionally cyclical industry. While the advent and rapid adoption of advanced technologies offset some of this cyclicality, investors should keep this in mind when paying a premium for the stock.

As a result, investors might want to wait for a pullback in the stock price to the point where it trades more in line with historical multiples before adding shares.

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