Broadcom Inc (AVGO, Financial) saw a decline of 3.43% in its daily stock price, with a 2.06% gain over the last three months. Despite an impressive Earnings Per Share (EPS) of 32.5, the question arises: Is the stock significantly overvalued? This article provides a comprehensive valuation analysis of Broadcom, offering valuable insights to investors.
A Glimpse into Broadcom Inc (AVGO, Financial)
Broadcom, a global semiconductor company, has expanded into various software businesses, generating over $30 billion in annual revenue. The company, primarily a fabless designer, sells 17 core semiconductor product lines across wireless, networking, broadband, storage, and industrial markets. Broadcom's business operations are an amalgamation of former companies like legacy Broadcom and Avago Technologies in chips, as well as Brocade, CA Technologies, and Symantec in software.
Despite a current stock price of $871.65, the GF Value estimates Broadcom's fair value at $667.59. The question then arises: Is Broadcom overvalued? This article delves into a detailed analysis of Broadcom's intrinsic value, providing investors with a comprehensive understanding of the company's valuation.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock. It's calculated based on historical multiples, a GuruFocus adjustment factor reflecting the company's past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price significantly exceeds the GF Value Line, the stock is likely overvalued, suggesting poor future returns. Conversely, if the stock price is significantly below the GF Value Line, it could be undervalued, indicating potentially higher future returns.
Considering Broadcom's current price of $871.65 per share, GuruFocus' valuation method suggests that the stock is significantly overvalued. Consequently, the long-term return of Broadcom's stock is likely to be much lower than its future business growth.
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Financial Strength of Broadcom
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before purchasing shares. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Broadcom's cash-to-debt ratio of 0.31 ranks worse than 84.5% of 903 companies in the Semiconductors industry. The overall financial strength of Broadcom is 6 out of 10, indicating fair financial health.
Profitability and Growth of Broadcom
Investing in profitable companies, especially those with consistent long-term profitability, poses less risk. A company with high profit margins is generally a safer investment than one with low profit margins. Broadcom has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $35.50 billion and Earnings Per Share (EPS) of $32.5. Its operating margin is 45.69%, which ranks better than 98.11% of 953 companies in the Semiconductors industry. Overall, GuruFocus ranks Broadcom's profitability at 9 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Broadcom is 13.3%, which ranks better than 53.2% of 874 companies in the Semiconductors industry. The 3-year average EBITDA growth is 26%, which ranks better than 54.71% of 775 companies in the Semiconductors industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) provides insights into its profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the ROIC should be higher than the WACC. For the past 12 months, Broadcom's ROIC is 25.6, and its WACC is 10.75.
Conclusion
Overall, Broadcom (AVGO, Financial) stock is believed to be significantly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 54.71% of 775 companies in the Semiconductors industry. To learn more about Broadcom stock, you can 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.
