Broadcom Inc. (AVGO) will announce its fiscal 2024 first-quarter earnings on March 7. Forecasts indicate a 31.8% year-over-year revenue surge to $11.75 billion. Moreover, analysts expect a slight uptick in the company’s EPS from the preceding year’s period to $10.39.

AVGO’s acquisition of VMware, completed on November 22, 2023, marks a significant step towards enhancing its investment in VMware Cloud Foundation. With VMware’s robust suite of services, including Tanzu for application deployment acceleration, AVGO is poised to bolster its cloud and edge offerings, catering to modernization demands.

Hock Tan, President and CEO of AVGO, emphasized the revolutionary impact of the acquisition during the latest earnings release. He said, “The acquisition of VMware is transformational. In fiscal year 2024 we expect semiconductor to sustain its mid to high single digit revenue growth rate, with the contribution of VMware driving consolidated revenue to $50 billion, and adjusted EBITDA to $30 billion.”

Moreover, the joint verification by SoftBank, NEC Corporation, and VMware, under AVGO’s ownership, validates the virtualization of the Radio Access Network (RAN), enabling the transition from traditional RAN to vRAN systems. The transition streamlines network operations, improving efficiency and scalability, which aligns well with AVGO’s strategic objectives for smart and efficient operations.

By adopting O-RAN architecture and optimizing for Telco Cloud, AVGO stands to benefit from open and unified operations throughout the network lifecycle. This approach should enhance operational efficiency and offer scalability and flexibility, further solidifying AVGO’s position as a leader in providing innovative solutions for telecommunications infrastructure.

Shares of AVGO 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 influence its price performance in the near term:

Sound Financials

During fiscal 2023 fourth quarter that ended October 29, 2023, AVGO’s non-GAAP net revenue increased 4.1% year-over-year to $9.30 billion. Its adjusted EBITDA grew 5.7% from the year-ago value to $6.05 billion.

Moreover, the company’s non-GAAP net income and non-GAAP earnings per common share rose 5.9% and 5.8% from the prior year’s period to $4.81 billion and $11.06, respectively.

Mixed Growth Record

Over the past three years, AVGO’s revenue and EBITDA increased 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 Analyst Estimates

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 anticipated to witness a 10.6% uptick from the previous year, reaching $46.72.

Looking ahead, analysts anticipate an 11% increase in revenue for the fiscal year ending October 2025, with projections reaching $55.34 billion. Similarly, EPS for the next year is expected to experience a growth of 19.6% from the prior year, settling at $55.90.

Robust 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 averages of 48.87% and 9.49%, respectively.

Moreover, the company’s trailing-12-month levered FCF margin of 37.56% is 315.9% higher than the 9.03% industry average. Similarly, its trailing-12-month net income margin of 39.31% compares with the industry average of 2.56%.

Stretched Valuation

In terms of forward non-GAAP 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 2.93x industry average.

Furthermore, 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 Exhibit Mixed Prospects

AVGO’s outlook is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AVGO’s A grade for Quality underscores its robust profitability, reflecting positively on its financial health. However, the stock has a C grade for Stability, mirroring its 24-month beta of 1.21, suggesting a degree of volatility in its stock performance.

Additionally, AVGO holds a D grade for Value, which is in sync with its elevated valuation relative to industry peers. The stock is ranked #22 out of 90 stocks in the Semiconductor & Wireless Chip industry. Click here to access AVGO’s Growth, Momentum, and Sentiment ratings.

Bottom Line

AVGO’s acquisition of VMware and partnerships with industry giants such as SoftBank and NEC highlight its dedication to advancing network infrastructure technology. These strategic initiatives position AVGO to offer holistic solutions, catering to the telecom sector’s dynamic demands and fostering market growth and competitiveness.

Despite such promising long-term prospects, the company’s current valuation, exceeding industry standards, coupled with instability, suggests that waiting for a better entry point in AVGO could be beneficial.

How Does Broadcom Inc. (AVGO) Stack Up Against Its Peers?

While AVGO has an overall grade of C, equating to a Neutral rating, you may check out these A (Strong Buy) and B (Buy) rated stocks within the Semiconductor & Wireless Chip industry: QUALCOMM Incorporated (QCOM), ChipMOS TECHNOLOGIES INC. (IMOS) and Everspin Technologies, Inc. (MRAM). To explore more Semiconductor & Wireless Chip stocks, click here.

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AVGO shares were unchanged in premarket trading Tuesday. Year-to-date, AVGO has gained 25.62%, versus a 7.78% rise in the benchmark S&P 500 index during 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 proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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