With a daily gain of 3.47% and a 3-month gain of 5.49%, Broadcom Inc (AVGO, Financial) has shown notable market activity. Yet, the question arises: with an Earnings Per Share (EPS) of 26.98, is the stock significantly overvalued? This article delves into Broadcom's valuation, providing investors with a clear perspective on its current market standing. Keep reading for an insightful analysis of Broadcom's intrinsic value.
Company Introduction
Broadcom Inc (AVGO, Financial) is a powerhouse in the semiconductor industry, ranking as the sixth-largest globally and boasting a diverse portfolio that extends into various software businesses. With a staggering $30 billion in annual revenue, Broadcom sells 17 core semiconductor product lines across multiple markets. The company's history is one of consolidation, having integrated legacy companies such as Broadcom and Avago Technologies, as well as Brocade, CA Technologies, and Symantec. When comparing Broadcom's stock price of $1300.39 to the GF Value, an estimated fair value of $786.38, a significant discrepancy emerges, prompting a deeper evaluation of the company's true worth.
Summarize GF Value
The GF Value is a unique measure of a stock's intrinsic value, incorporating historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. If a stock's price significantly exceeds its GF Value, it may be overvalued, suggesting a potentially lower future return. Conversely, a price below the GF Value could indicate higher future returns. Currently, Broadcom (AVGO, Financial) is deemed significantly overvalued with a market cap of $602.60 billion. This assessment suggests that the long-term return on Broadcom's stock may not align with the company's growth trajectory.
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Financial Strength
Assessing a company's financial strength is crucial before investing. Broadcom's cash-to-debt ratio of 0.16 places it at a lower rank compared to its peers within the semiconductor industry. With an overall financial strength rating of 5 out of 10, Broadcom's financial health is deemed fair, but it's essential to consider the associated risks of investing in a company with a substantial debt load.
Profitability and Growth
Consistent profitability is a sign of a lower-risk investment. Broadcom has maintained profitability for 9 out of the past 10 years, with an impressive operating margin of 38.7%, ranking higher than most of its industry counterparts. This strong profitability, coupled with a revenue of $38.90 billion and an EPS of $26.98, positions Broadcom favorably with a profitability rank of 9 out of 10. Growth is also a vital component of valuation, and Broadcom's 3-year average revenue and EBITDA growth rates are commendable, surpassing a significant portion of the industry.
ROIC vs. WACC
An effective measure of a company's value creation is the comparison of its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). When ROIC exceeds WACC, it indicates that the company is generating value for its shareholders. Broadcom's ROIC of 17.18 is higher than its WACC of 11.59, signaling effective capital management and value creation.
Conclusion
Despite its strong financial condition and profitability, Broadcom (AVGO, Financial) stock seems to be significantly overvalued. With a growth ranking that outperforms more than 65% of companies in the semiconductors industry, Broadcom presents a compelling case for investors. To explore Broadcom's financials further, interested parties can examine the 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.
