With a $236.37 billion market cap, Broadcom Inc. (AVGO) in Glen Rock, N.J., is one of the largest semiconductor solutions companies in the world. It provides industry-leading semiconductor and infrastructure software solutions to data centers, telecom, cyber security, and enterprise industries globally. The company operates in two segments: Semiconductor Solutions and Infrastructure Software. Also, AVGO has an ISS Governance QualityScore of 4, indicating relatively low governance risk.
AVGO stock has declined 13.4% in price year-to-date and 9.1% over the past month. This compares with VanEck Vectors Semiconductor ETF's (SMH) 24.1% decline year-to-date and 12.5% slump over the past month.
The continuing market correction and Intel Corporation's (INTC) warning regarding declining demand for computers have caused the stock to lose momentum lately. Furthermore, continuing supply chain disruptions that are worsening the global semiconductor shortage have been weighing on semiconductor stocks of late.
Here is what could shape AVGO's performance in the near term:
Robust Financials
AVGO's revenues increased 16% year-over-year to $7.71 billion in its fiscal year 2022 first quarter (ended January 31). This can be attributed to a 20% rise in semiconductor solutions revenue. Its non-GAAP net income improved 25.8% from the same period last year to $3.74 billion, while its EPS rose 26.9% from the prior-year quarter to $8.39. Its operating cash inflow and free cash flow increased 12% and 12.9%, respectively, to $3.49 billion and $3.39 billion. Its adjusted EBITDA came in at $4.82 billion, up 22.3% year-over-year.
AVGO paid $1.80 billion in dividends and repurchased $2.70 billion worth of shares, thus effectively returning $4.50 billion to shareholders in the last quarter.
AVGO President and CEO Hock Tan said, "Broadcom's record first-quarter results were driven by strong enterprise demand and continued investments in next-generation technology by hyperscale and service providers."
Bullish Growth Prospects
Analysts expect AVGO's revenue and EPS to increase 19.7% and 31.7%. respectively, year-over-year to $7.91 billion and $8.88 in its fiscal year 2022 second quarter (ending April 30, 2022). The $7.98 billion consensus revenue estimate for the next quarter indicates a 17.8% improvement from the same period last year. In addition, the Street expects AVGO's EPS to rise 27.6% year-over-year to $8.88.
The company's annual revenue is expected to improve 16.7% year-over-year in fiscal 2022 and 6.1% year-over-year in its fiscal year 2023. The consensus EPS estimates indicate a 26.8% improvement in the current year and a 9.1% rise next year.
Consensus Rating and Price Target Indicate Potential Upside
Each of the 12 Wall Street analysts that rated AVGO has rated it a Buy. The 12-month median price target of $711.67 indicates a 22.9% potential upside from yesterday's closing price of $578.94. The price targets range from a low of $657.00 to a high of $775.00.
POWR Ratings Reflect Rosy Prospects
AVGO has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
AVGO has an A grade for Quality and a B for Growth and Sentiment. The company's trailing-12-month net income margin and ROE of 27.47% and 32.09%, respectively, are significantly higher than the 5.58% and 7.30% industry averages, in sync with its Quality grade. In addition, AVGO's revenues and EBIT have increased at CAGRs of 10.2% and 21.5%, respectively, over the past three years, justifying its Growth grade. Also, the company's impressive earnings growth prospects match the Sentiment grade.
Among the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #6.
Beyond what I have stated above, view AVGO ratings for Stability, Momentum, and Value here.
Click here to checkout our Semiconductor Industry Report for 2022
Bottom Line
Despite the weakening demand for personal computers, the semiconductor industry is expected to grow tremendously over the long term, given the vast applications of semiconductor chips across multiple industries. Analysts expect AVGO's revenues and earnings to improve substantially over the next year. Thus, we think it could be wise to buy the dip in AVGO now.
Note that AVGO is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
How does Broadcom (AVGO) Stack Up Against its Peers?
AVGO has an overall POWR Rating of A, which equates to a Strong Buy rating. Check out these other stocks within the Semiconductor & Wireless Chip industry with A (Strong Buy) ratings: Semtech Corporation (SMTC), Photronics, Inc. (PLAB), and STMicroelectronics N.V. (STM).
AVGO shares were trading at $569.56 per share on Friday morning, down $9.38 (-1.62%). Year-to-date, AVGO has declined -13.83%, versus a -11.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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