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Broadcom Inc. (AVGO) Is a Trending Stock: Facts to Know Before Betting on It

Broadcom Inc. (AVGO) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Shares of this chipmaker have returned -7.6% over the past month versus the Zacks S&P 500 composite's +3.5% change. The Zacks Electronics - Semiconductors industry, to which Broadcom Inc. belongs, has lost 2.5% over this period. Now the key question is: Where could the stock be headed in the near term?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Revisions to Earnings Estimates

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Broadcom Inc. is expected to post earnings of $1.37 per share, indicating a change of +23.4% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $4.73 points to a change of +11.8% from the prior year. Over the last 30 days, this estimate has changed +0.1%.

For the next fiscal year, the consensus earnings estimate of $5.93 indicates a change of +25.4% from what Broadcom Inc. is expected to report a year ago. Over the past month, the estimate has remained unchanged.

Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Broadcom Inc. is rated Zacks Rank #3 (Hold).

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Revenue Growth Forecast

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

For Broadcom Inc. the consensus sales estimate for the current quarter of $14.02 billion indicates a year-over-year change of +50.9%. For the current and next fiscal years, $51.17 billion and $59.25 billion estimates indicate +42.8% and +15.8% changes, respectively.

Last Reported Results and Surprise History

Broadcom Inc. reported revenues of $13.07 billion in the last reported quarter, representing a year-over-year change of +47.3%. EPS of $1.24 for the same period compares with $1.05 a year ago.

Compared to the Zacks Consensus Estimate of $12.9 billion, the reported revenues represent a surprise of +1.31%. The EPS surprise was +3.33%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.

Valuation

Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Broadcom Inc. is graded F on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Broadcom Inc. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.

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