Yahoo Finance Broadcom Selloff Explained! Should You Buy the Dip in AVGO Stock?
Broadcom Inc. AVGO stock suffered its worst rout since the pandemic on Friday after the company’s tepid revenue forecast discouraged investors who have been betting on robust demand for artificial intelligence (AI) chips to drive the company’s growth. But is it the right time to sell the stock, or should you rather remain bullish and consider this as a buying prospect? Let’s have a look –
Broadcom Falls Behind Q3 Expectations
Broadcom recently posted positive fiscal third-quarter earnings, but it wasn’t good enough to impress investors who had high hopes amid the AI boom. Broadcom’s guidance for the fourth quarter also couldn’t keep up with expectations.
For the quarter ending on Aug. 4, Broadcom’s revenues soared 47.3% year over year to $13.07 billion and earnings per share (EPS) came in at $1.24 a share, up 18.1% from a year ago. The acquisition of VMware and continued strength in AI semiconductor solutions boosted the quarterly performance. However, the top and bottom lines only met Wall Street projections, which didn’t satisfy investors.
Broadcom expects revenues for the fiscal fourth quarter (ending on Nov. 3) to come in at $14 billion, indicating 51% year-over-year growth. However, market participants estimated fourth-quarter revenues of $14.11 billion. So, Broadcom’s fourth-quarter revenue outlook fell slightly short of expectations.
Broadcom Stock Falls, But Still Trading Above the 200DMA
Broadcom’s shares plunged more than 10% on Friday following the quarterly results that couldn’t fulfill heightened expectations of growth-hungry investors.
However, these investors do have faith in Broadcom. They drove the company’s shares up 22.7% year to date and bet heavily on hardware that supports generative AI technology.
Despite Friday’s rout, Broadcom’s shares continue to trade above the 200-day moving average (DMA) this year, indicating a long-term bullish trend.
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Key AVGO Tailwinds: AI Boom & VMware Acquisition
Broadcom’s AI orders primarily depend on three customers – Alphabet Inc. GOOGL, Meta Platforms, Inc. META, and ByteDance. However, dependency on such a few customers may raise doubts about the company’s scalability. Yet, the company is poised to do well into next year as AI demand is likely to stay.
Broadcom’s CEO Hock Tan recently said that AI revenues for the fiscal fourth quarter are expected to grow 10% sequentially to around $3.5 billion. The company expects AI revenues to hit $12 billion for fiscal 2024, banking on an increase in demand for custom accelerators for ethernet networking switches and AI data centers. Further, Tan expects strong growth from the company’s AI business in fiscal 2025.
Since Broadcom’s VMware acquisition in November 2023, the company has benefitted. The VMware acquisition largely drove Broadcom’s revenue growth in the fiscal third quarter. The transition of VMware Cloud Foundation from perpetual to subscription licensing would continue to further benefit customers, and establish predictable recurring revenues.
Broadcom Stock Generates Strong Free Cash Flow
Broadcom generated strong free cash flow (FCF) and FCF margin in the fiscal third quarter. The company’s FCF touched $4.791 billion for the quarter, up 4.2% year over year.
The FCF margin was also strong at 36.65% (i.e., $4.791 billion/$13.07 billion in revenues). The FCF margin is slightly more than last quarter’s 36%.
Thus, a strong cash flow implies that Broadcom can pay off its dues, contribute to growth, and increase shareholders’ wealth through dividends. Broadcom has a solid dividend yield of 1.53%, and its payout has advanced by 13.9% in the past five years.
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Broadcom Stock Has a Very Strong ROE
Broadcom has been generating profits proficiently for quite some time. This is because, Broadcom stock’s return on equity (ROE) is 37.7%, while the Electronics - Semiconductors industry’s is 24.3%. This means that Broadcom has a better potential to lead you to profits than its peers.
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Strong Price Upside for Broadcom Stock
Despite the current hiccup in share prices, the long-term bodes well for the Broadcom stock. The company’s competence to make the most of the AI bandwagon, inherent capability to pay off debts, and generate consistent profits have led to prominent brokers jacking up its share price target.
They have increased the average short-term price target of AVGO by 24.7% from the stock’s last closing price of $152.82. The analysts’ highest price target is at $240, an upside of 57.1%.
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Broadcom Stock is Expensive, Here’s How to Trade It
In spite of the positives, buying Broadcom’s shares may burn a hole in one’s pocket. This is because the AVGO stock is still pricey. Per the price/earnings ratio, the AVGO stock currently trades at 28.9X forward earnings. However, AVGO’s rivals or the peer group’s forward earnings multiple is 19.2X.
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Hence, it is prudent for investors to wait for the right entry point, or maybe wait for the stock price to fall further. Those who have invested in Broadcom should stick to it since the AVGO stock is for the future, as AI is the next big thing.
Broadcom has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
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