Broadcom (AVGO) has made a remarkable comeback, rejoining the elite group of trillion-dollar market cap companies after a 70% rebound since April's peak in trade-related bearish sentiment. This rebound was fueled by a variety of factors, including the company's substantial exposure to China and its substantial semiconductor revenue.
Despite the volatility caused by Broadcom's exposure to China and tariffs, the company has reported solid growth in AI and software revenue during its April quarter and provided optimistic forward guidance. Additionally, Broadcom's announcement of a $10 billion share buyback program signaled strong confidence from management.
Looking through Broadcom's recent updates, it's clear that the company is delivering efficient value creation for shareholders. Its latest quarterly results highlighted a clear split between business segments, with semiconductor revenue unrelated to AI staying stable at around $4 billion, while the AI segment is growing fast and has become the company's main growth driver.
Broadcom's strong margins and accelerating revenue tell a compelling story. The company expects an adjusted EBITDA margin of at least 66% next quarter, highlighting its lean, highly profitable business model. By focusing solely on chip design and outsourcing manufacturing, Broadcom keeps costs low and maintains margins comparable to those of Nvidia (NVDA).
As an asset-light business, Broadcom has a model that stands in contrast to companies like Intel (INTC) and Micron (MU), which combine design and manufacturing and require heavy capital investment. This difference has clearly appealed to investors and helped support Broadcom's strong financial performance, particularly in its consistent return of value to shareholders.
Broadcom's ability to consistently generate high returns on capital is a key part of the investment thesis. It reinforces the strength of Broadcom's moat and highlights the discipline in how it allocates available capital. The stock currently trades at a forward P/E ratio of 37.78 and a PEG ratio of 1.6x, based on a solid long-term EPS growth rate of 23% CAGR. While it's not cheap in absolute terms, it doesn't look unreasonable either, especially when factoring in future growth.
Optimism surrounding AVGO stock is evident among Wall Street analysts. Out of 29 covering the stock, 27 have bullish ratings, with only two staying neutral. Although the valuation appears stretched, suggesting limited upside, AVGO's average stock price target of $286.60 implies a 15% upside over the next twelve months.
In conclusion, Broadcom appears increasingly well-positioned to scale its operations and capitalize on the substantial demand for AI. Add to that its strong track record of creating shareholder value, and it's no surprise that this is reflected in the trade at a well-deserved premium valuation. While some might find the current multiples a bit steep, I would caution against waiting for a correction to enter the market. High-quality stocks like Broadcom often deliver better risk-adjusted returns when trading near their peak than when they're "on sale." With that in mind, I believe a bullish stance on AVGO makes the most sense at this time.
