Broadcom Stock: Growth at a More-than-Reasonable Price

Bouncing back after the late September market selloff, does Broadcom (AVGO) stock have room to hit new highs? It’s possible. 

Shares in the semiconductor and infrastructure software name made their way above $500 per share last month. This was after delivering solid numbers for the past fiscal quarter, and strong guidance for the quarters ahead.

Unlike many stocks in the tech sector, this one offers up a much better mix of growth and value. That is, in contrast to other tech plays, this one trades at a more-than-reasonable valuation, with a relatively high dividend (2.92% forward yield) to boot.

With more strong revenue and earnings results likely, and room for it to see its price-to-earnings (P/E) multiple expand, I am bullish on it at today’s prices (around $492 per share).

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Why AVGO Stock has Room to Hit New Highs

Investors may think that Broadcom’s strong results as of late are entirely due to the global chip shortage. However, there are other drivers at play that are enabling it to meet and slightly beat expectations.

Demand from its key end users (cloud computing, mobile communications) is also playing a big role in its performance. For instance, the buildout of 5G infrastructure, and the rollout of 5G devices, particularly the rollout of Apple’s (AAPL) iPhone 13, are boosting Broadcom’s results.

With demand for the latest incarnation of the iPhone coming in higher than expected, it makes sense that the lion’s share of sell-side analysts have upped their earnings-per-share (EPS) estimates for AVGO stock this fiscal quarter (ending October 31, 2021).

Between now, and when it announces results again in December? Shares could see a gradual climb to prices above its past highs. That could be both on earnings growth, and possible expansion of its forward valuation.

Current Valuation Based on Incorrect Perceptions from Investors

The main appeal with AVGO stock isn’t that many trends are on its side. Rather, the main appeal is the fact that it’s projected to see double-digit percentage growth in its sales and earnings. All while trading at a valuation not only below tech names of its side, but of the market overall as well.

Why, with a forward P/E ratio of 17.6x, is Broadcom a lot cheaper than chip names like Advanced Micro Devices (AMD) and Nvidia (NVDA), which trade at P/E ratios of 41.9x and 51.01x, respectively? Two reasons. First, both of these chip stocks are projected to see much higher rates of growth. Second, mobile chip makers, like this company, as well as direct peers such as Qualcomm (QCOM), are viewed as more cyclical, and thus deserving a lower forward multiple.

However, in my view, both are incorrect perceptions from investors. Analyst consensus calls for Broadcom to grow its earnings by about 11.2% between this fiscal year (ending October 2021) and the next (fiscal year ending October 2022). Yet, based on the tailwinds discussed above, it has high chances of hitting numbers that come in at the top end of estimates. That would be $35.05 per share, or 25.5% earnings growth.

With its diversification into infrastructure software, which will continue as it makes more acquisitions, over time it makes less sense to give it a valuation on par with Qualcomm rather than on par with more premium-priced chip names. A move to a multiple on par with AMD and Nvidia may be wishful thinking. But a move from a 15x-20x P/E to one between 20x and 25x could be attainable.

What Analysts are Saying About AVGO Stock

According to TipRanks, AVGO stock has a consensus rating of Strong Buy. Out of 20 analyst ratings, 18 rate it a Buy, 2 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average analyst price target on AVGO stock today is $570.94 per share, implying around 15.84% in upside from today’s prices. Analyst price targets range from a low of $540 per share to a high of $600 per share.

Bottom Line: In a Space That’s Seemingly ‘Too Hot to Touch,’ Broadcom Seems a Good Choice

It’s too early to tell how tech stocks will fare in the next year. The Federal Reserve’s monetary tightening plans could play gradually enough to prevent a correction. Or, taper/interest rate increases could happen faster than Wall Street today expects, resulting in further market turmoil.

With this, investors looking for a tech growth play that’s not richly-priced may want to take a look at AVGO stock.

Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.

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