With a daily gain of 1.61% and a 3-month loss of 0.31%, Broadcom Inc (AVGO, Financial) presents an intriguing case for value investors. The company's Earnings Per Share (EPS) stands at 32.5, prompting the question: Is the stock significantly overvalued? This article provides a detailed valuation analysis of Broadcom, offering potential investors valuable insights into the company's financial health and market position.
A Snapshot of Broadcom Inc (AVGO, Financial)
Broadcom Inc, the sixth-largest semiconductor company globally, has diversified into various software businesses, generating over $30 billion in annual revenue. The company sells 17 core semiconductor product lines across wireless, networking, broadband, storage, and industrial markets. It is primarily a fabless designer with some in-house manufacturing, such as its best-of-breed FBAR filters sold into the iPhone. Apple is a significant customer, accounting for approximately one-fifth of sales. In the software realm, it sells infrastructure and security software to large financial institutions and governments. The company's current market cap is $366.80 billion, with a stock price of $888.63 per share, significantly higher than its GF Value of $667.44.
Understanding the GF Value of Broadcom (AVGO, Financial)
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line, visible on our summary page, indicates the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is likely overvalued, and its future return may be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on our valuation method, Broadcom (AVGO, Financial) appears to be significantly overvalued. The stock's current price significantly exceeds the GF Value Line, indicating that its long-term return is likely to be lower than its future business growth.
Financial Strength of Broadcom (AVGO, Financial)
Investing in companies with weak financial strength can result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Broadcom's cash-to-debt ratio is 0.31, ranking worse than 84.51% of 904 companies in the Semiconductors industry. Based on this, GuruFocus ranks Broadcom's financial strength as 6 out of 10, suggesting a fair balance sheet.
Profitability and Growth of Broadcom (AVGO, Financial)
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Broadcom has been profitable 9 years over the past 10 years, with revenues of $35.50 billion and Earnings Per Share (EPS) of $32.5 in the past 12 months. Its operating margin of 45.69% is better than 98.11% of 954 companies in the Semiconductors industry. GuruFocus ranks Broadcom's profitability as strong.
Growth is a critical factor in a company's valuation. The 3-year average annual revenue growth rate of Broadcom is 13.3%, ranking better than 53.2% of 874 companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 26%, ranking better than 54.84% of 775 companies in the Semiconductors industry.
ROIC vs WACC: A Look at Broadcom's Profitability
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) provides another perspective on its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, Broadcom's ROIC is 25.6, and its cost of capital is 10.75.
Conclusion
In summary, Broadcom (AVGO, Financial) appears to be significantly overvalued. The company's financial condition is fair, its profitability is strong, and its growth ranks better than 54.84% of 775 companies in the Semiconductors industry. To learn more about Broadcom stock, check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
