Broadcom Inc (AVGO, Financial) recently recorded a daily loss of 5.46% and a 3-month gain of 11.04%. Its Earnings Per Share (EPS) stands at 31.89. However, is the stock significantly overvalued? In this article, we will delve into the valuation analysis of Broadcom (AVGO) to answer this question. We invite you to continue reading for an in-depth understanding of the company's financial health and future prospects.
Company Introduction
Broadcom is the sixth-largest semiconductor company globally, boasting over $30 billion in annual revenue. The company sells 17 core semiconductor product lines across various markets, including wireless, networking, broadband, storage, and industrial. Besides, Broadcom has expanded into various software businesses, selling infrastructure and security software to large financial institutions and governments. Apple is a significant customer, accounting for roughly one-fifth of sales. Notably, Broadcom's current stock price stands at $872.52, considerably higher than the GF Value of $654.67, indicating a potential overvaluation.
Understanding the GF Value
The GF Value is an exclusive measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. It provides a benchmark for the fair trading value of a stock. A stock price significantly above the GF Value Line indicates overvaluation, suggesting a likely poor future return. Conversely, a stock price significantly below the GF Value Line suggests a higher future return.
According to GuruFocus Value calculation, Broadcom (AVGO, Financial) appears to be significantly overvalued. With a market cap of $360.10 billion and a stock price of $872.52 per share, the future return of Broadcom's stock is likely to be much lower than its future business growth due to the significant overvaluation.
Financial Strength
Investing in companies with poor financial strength can pose a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Broadcom's cash-to-debt ratio stands at 0.29, ranking worse than 85.14% of 895 companies in the Semiconductors industry. However, the overall financial strength of Broadcom is 6 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies tends to carry less risk. Broadcom has been profitable for 9 out of the past 10 years, with revenues of $35 billion and Earnings Per Share (EPS) of $31.89 in the past 12 months. Its operating margin of 45.3% is better than 97.76% of 939 companies in the Semiconductors industry, indicating strong profitability .
Growth is a critical factor in a company's valuation. The 3-year average annual revenue growth of Broadcom is 13.3%, which ranks better than 53.19% of 863 companies in the Semiconductors industry. Its 3-year average EBITDA growth rate is 26%, ranking better than 54.63% of 767 companies in the industry, indicating a strong growth trajectory.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted cost of capital (WACC) can provide insights into its profitability. Broadcom's ROIC of 24.78 is significantly higher than its WACC of 10.35, indicating efficient cash flow generation relative to the capital invested in its business.
Conclusion
Conclusively, Broadcom (AVGO, Financial) appears to be significantly overvalued. Despite its fair financial condition and strong profitability, the company's stock price is much higher than its intrinsic value, indicating a likely lower future return. To learn more about Broadcom stock, check out its 30-Year Financials here.
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