Broadcom Inc.'s acquisitions and strategic collaborations. (AVGO) with industry leaders are undoubtedly laying a strong foundation for significant long-term growth. However, with earnings on the horizon, would it be prudent to invest in AVGO stock now? Let's examine whether the company's fundamentals support this potential….
Broadcom Inc. (AVGO) will announce its fiscal first quarter 2024 earnings on March 7. Forecasts show a 31.8% year-over-year increase to $11.75 billion. Additionally, analysts expect a slight increase in the company's EPS from the prior year period to $10.39.
AVGO's acquisition of VMware, completed on November 22, 2023, marks a significant step toward increasing its investment in the VMware Cloud Foundation. With VMware's powerful suite of services, including Tanzu to accelerate application deployment, AVGO is poised to strengthen its cloud and edge offerings, meeting the demands of modernization.
Hock Tan, President and CEO of AVGO, highlighted the revolutionary impact of the acquisition during the recent earnings release. He said, “The VMware acquisition is transformational. In fiscal 2024 we expect Semiconductor to maintain its mid-to-high single-digit revenue growth rate, with VMware's contribution driving consolidated revenue to $50 billion and Adjusted EBITDA at $30 billion.”
Additionally, joint verification by SoftBank, NEC Corporation and VMware, under the ownership of AVGO, attests Radio Access Network (RAN) virtualization, enabling the transition from traditional RAN systems to vRAN. The transition streamlines network operations, improving efficiency and scalability, which aligns well with AVGO's strategic objectives for intelligent and efficient operations.
By adopting O-RAN architecture and optimizing for Telco Cloud, AVGO will benefit from open and unified operations throughout the network lifecycle. This approach should increase operational efficiency and provide scalability and flexibility, further strengthening AVGO's position as a leader in providing innovative solutions for telecommunications infrastructure.
AVGO shares have gained 60.8% over the past six months and 121.6% over the past year, closing the last trading session at $1,402.26.
Here are the financial aspects of AVGO that could affect its price performance in the near term:
Sound finances
During the fiscal 2023 fourth quarter ended October 29, 2023, AVGO's non-GAAP net income increased 4.1% year-over-year to $9.30 billion. Her Adjusted EBITDA increased by 5.7% from the previous year's value to 6.05 billion dollars.
Additionally, the company's non-GAAP net income and non-GAAP earnings per common share increased 5.9% and 5.8% from the prior-year period to $4.81 billion and $11.06, respectively.
Mixed Growth Record
Over the past three years, AVGO's revenue and EBITDA grew at a CAGR of 14.5% and 21.5%, respectively. Its net income and EPS grew at respective CAGRs of 68.2% and 73.4% during the period. However, the company's total assets declined at a CAGR of 1.4% over the same time frame.
Optimistic estimates of analysts
The consensus revenue estimate for the fiscal year ending October 2024 stands at $49.84 billion, signaling a 39.1% year-over-year increase. Likewise, the company's EPS is projected to witness an increase of 10.6% from last year, reaching $46.72.
Looking ahead, analysts predict an 11% increase in revenue for the fiscal year ending in October 2025, with forecasts reaching $55.34 billion. Similarly, next year's EPS is expected to experience a 19.6% increase from last year, settling at $55.90.
Strong profitability
The stock's trailing 12-month gross profit margin and trailing 12-month EBITDA margin of 74.11% and 56.40% are 51.6% and 494.3% higher than the industry average of 48.87% and 9.49%, respectively.
Additionally, the company's trailing 12-month FCF margin of 37.56% is 315.9% higher than the industry average of 9.03%. Similarly, the trailing 12-month net income margin of 39.31% compares to the industry average of 2.56%.
Extended assessment
In terms of non-GAAP forward P/E, AVGO is trading at 29.86x, 18.3% higher than the industry average of 25.24x. Its forward EV/Sales of 13.52x is 361.2% higher than the industry average of 2.93x.
Additionally, the stock's forward EV/EBITDA and forward Price/Sales of 22.64x and 13.01x are 46.6% and 336.1% higher than the industry average of 15.45x and 2.98x, respectively.
POWR ratings show mixed outlook
AVGO's point of view is evident in it POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted on an optimal scale.
Our proprietary rating system also rates each stock based on eight different categories. AVGO's A Quality Grade underlines its strong profitability, reflecting positively on its financial health. However, the stock has a grade of C for Stability, reflecting a 24-month beta of 1.21, suggesting a degree of volatility in the stock's performance.
Additionally, AVGO maintains a D grade for Value, which is in sync with its elevated rating relative to industry peers. The stock is ranked #22 out of 90 stocks in the Semiconductor chip and wireless industry. Click here to access AVGO's Growth, Momentum and Sentiment ratings.
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AVGO's acquisition of VMware and partnerships with industry giants such as SoftBank and NEC underscore its commitment to advancing network infrastructure technology. These strategic initiatives position AVGO to provide holistic solutions, adapting to the dynamic demands of the telecom sector and driving market growth and competition.
Despite such promising long-term prospects, the company's current valuation, outperforming industry benchmarks, coupled with volatility, suggests that waiting for a better entry point into AVGO could be beneficial.
How Broadcom Inc. Works (AVGO) against her colleagues?
While AVGO has an overall grade of C, equal to a neutral rating, you can view these A (Strong Buy) and B (Buy) rated stocks within Semiconductor chip and wireless industry: QUALCOMM Incorporated (QCOM), ChipMOS TECHNOLOGIES INC. (WAY) and Everspin Technologies, Inc. (MRAM). To explore more semiconductor and wireless chip stocks, Click here.
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Shares of AVGO were flat in premarket trading on Tuesday. Year-to-date, AVGO has gained 25.62%, versus a 7.78% gain in the benchmark S&P 500 over the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is adept at assessing the long-term prospects of stocks with her fundamental analysis skills. Its purpose is to help investors build portfolios with sustainable returns.
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