Broadcom’s Stock Shows Resilience Amid Macroeconomic Uncertainty

Broadcom Inc. (NASDAQ: AVGO) has faced a roughly 4% year-to-date decline, paralleling a broader downturn in the NASDAQ index. This trend has been influenced by uncertain macroeconomic conditions, including ongoing tariffs and trade tensions. However, recent developments such as the trade agreement between the U.S. and U.K. and a 90-day pause in high tariffs between the U.S. and China could signal a potential resolution to these issues.

Despite the recent dip, AVGO has demonstrated impressive long-term growth, surging over 300% since early 2023. This performance is driven by several key factors:

• A notable 190% increase in the company’s price-to-earnings (P/E) ratio, rising from 14 in 2022 to the current 41.
• A substantial 61% growth in adjusted net income, climbing from $16 billion to $26 billion; however, this is partially offset by:
• A 14% increase in the total number of outstanding shares, now totaling 4.8 billion.

AI and VMware: Catalysts for Broadcom’s Revenue Growth

Broadcom’s remarkable performance is largely due to its growing AI product line and the strategic acquisition of VMware in 2023. This synergy has led to a significant 64% revenue increase, with total sales rising from $33 billion in 2022 to $55 billion over the past year.

A key driver behind this growth is the company’s AI revenue, which reached $12.2 billion in fiscal year 2024, representing an impressive 220% year-over-year increase. This surge is primarily fueled by strong market demand for Broadcom’s custom AI accelerators (XPUs) and Ethernet products.

With a comprehensive suite of networking and storage solutions, cybersecurity offerings, and semiconductor products, Broadcom has strategically positioned itself to capitalize on the ongoing generative AI boom.

Key Factors Behind Broadcom’s Profitability

Broadcom has maintained an adjusted net margin exceeding 45% in recent years. This strong profitability is largely attributable to its embrace of the rapidly growing AI market, particularly through high-demand custom AI accelerators and networking solutions. The transformative acquisition of VMware has further bolstered revenue and margins through a significant infrastructure software component, shifting towards recurring subscriptions. Together with a solid core semiconductor business and a focus on operational efficiency, these factors have positioned Broadcom for sustained financial success.

The Tripling of Valuation Multiple: What’s Driving It?

Broadcom’s custom AI accelerators (XPUs) have been critical in enhancing the company’s financial transformation and overall valuation. This impact is reflected in Broadcom’s adjusted P/E ratio, which expanded threefold, from 14x in 2022 to 41x currently. This dramatic increase in investor sentiment was driven by the company’s improved financial performance, characterized by robust sales growth and heightened profitability.

This financial evolution unfolded against the backdrop of a challenging market, particularly the inflation shock of 2022. This event led to a considerable Stock market correction. During this turbulent phase, AVGO saw a steep 36% drop from its January 2022 high of $67 to a low of $43 by October 2022, which was more pronounced than the S&P 500’s peak-to-trough decline of 25.4%. The recovery took until May 2023 to fully return to its pre-crisis peak, illustrating the company’s resilience in difficult conditions.

Looking Ahead: Is AVGO Stock Worth Buying at $220?

Currently trading at $220, Broadcom’s Stock carries a P/E ratio of 41, based on its trailing adjusted earnings per share of $5.36. While this multiple is not inexpensive, being noticeably higher than the company’s three-year average P/E ratio of around 30x, it appears justified given the significant opportunities in the rapidly expanding AI sector.

These advancements are anticipated to support sales growth. Historically, the company has achieved an average sales growth rate of 24% over the past three years, with projections suggesting mid-teens growth over the next three years. Importantly, growth in the bottom line is expected to outpace revenue increase.

For long-term investors, any potential pullback in AVGO Stock could represent an attractive entry point, owing to the company’s robust fundamentals and positioning in the AI market. Those wary of short-term volatility might want to explore strategies, such as the Trefis High Quality (HQ) Portfolio strategy, comprising 30 stocks with a history of comfortably outperforming the S&P 500 over the last four years. This approach generally yields higher returns with lower risk compared to traditional benchmarks.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.