Broadcom Inc.’s (AVGO) third-quarter EPS and revenue edged past Wall Street’s expectations. Segment-wise, AVGO’s semiconductor solutions accounted for 78% of total net revenue, amounting to $6.94 billion, while infrastructure software contributed 22%, totaling $1.94 billion in the recent quarter.

So, I think the stock is a solid buy this month for the reasons discussed throughout this article.

Over the past three years, AVGO’s EBIT and EBITDA have increased at CAGRs of 61.4% and 24.7%. Its net income and EPS have grown at CAGRs of 77.6% and 83.2% over the same period.

Looking ahead to the fourth quarter of fiscal year 2023, which ends on October 29, 2023, AVGO expects its fourth quarter revenue of approximately $9.27 billion and  adjusted EBITDA to be approximately 65% of projected revenue.

Moreover, AVGO has consistently delivered robust earnings, allowing it to generously reward its shareholders over the past decade. As of September 29, 2023, AVGO distributed a quarterly dividend of $4.60 per share. With an annual dividend of $18.40, this equates to an impressive 2.23% yield based on the current share price. AVGO’s four-year average dividend yield stands at a solid 3.10%.

AVGO’s dividend payments have exhibited remarkable growth rates, with CAGRs of 12.3% and 21.3% over the past three and five years, respectively. The company has maintained a streak of 12 consecutive years of dividend increases, highlighting its commitment to shareholder value.

Furthermore, AVGO has soared 69.9% over the past year and 47.4% year-to-date, closing the last trading session at $823.86. It has gained 30.4% over the past six months. Also, the stock is currently trading above its 200-day moving average of $722, indicating an uptrend.

Here is what could shape AVGO’s performance in the near term:

Brand New Launch

On October 2, 2023, AVGO unveiled its cutting-edge 5nm 200G/lane optical PAM-4 DSP PHY, named Sian™ BCM85822, at ECOC 2023. This innovation provides 200G/lane serial optical interfaces, enabling cost-effective production of 800G and 1.6T pluggable modules to meet the rising bandwidth and low power demands of hyperscale data centers.

This development is significant as it addresses the escalating bandwidth requirements driven by AI workloads in hyperscale data centers. Implementing 1.6T OSFP-XD transceiver modules can double bandwidth capacity per 1RU without altering existing infrastructure.

Partnership With Google to Enhance Cybersecurity with Generative AI Integration

On September 26, AVGO’s division, Symantec, announced a partnership with Google Cloud to integrate generative AI (gen AI) into the Symantec Security platform. The partnership aims to bridge the cybersecurity talent gap by making security tools more accessible and user-friendly for less experienced staff.

Symantec will utilize Google Cloud’s AI tools to enable natural language interfaces and provide more comprehensive and user-friendly threat analyses.

Robust Financials

AVGO’s net revenue for the fiscal third quarter ended July 30, 2023, increased 4.9% year-over-year to $8.88 billion, while its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. In addition, the company’s non-GAAP net income and non-GAAP EPS improved 8.4% and 8.3% from the prior-year quarter to $4.60 billion and $10.54, respectively.

Optimistic Analysts Estimates

The consensus revenue estimate of $9.28 billion for the fiscal fourth quarter (ending October 2023) reflects a 3.9% rise year-over-year. The consensus EPS estimate of $10.95 for the current quarter indicates a 4.8% year-over-year improvement.

Moreover, analysts expect AVGO’s revenue to rise 7.9% year-over-year to $35.82 billion in the current fiscal year ending October 2023. Its EPS is also expected to improve 12% from the previous-year quarter to $42.15 in the current year. Additionally, the company has an excellent surprise history, surpassing the revenue and EPS estimates in each of the trailing four quarters.

Attractive Valuation

AVGO’s forward EV/EBIT of 16.61x is 2.5% lower than the industry average of 17.04x. Its forward non-GAAP P/E of 19.54x is 8.3% lower than the industry average of 21.32x.

Robust Profitability

AVGO’s trailing-12-month EBIT and EBITDA margins of 45.70% and 57.34% are favorably higher than the industry averages of 4.66% and 9.17%. Its trailing-12-month net income margin of 39.25% is remarkably higher than the industrial average of 2.03%.

In addition, its trailing-12-month ROCE, ROTC, and ROTA of 64.57%, 16.63%, and 19.44% are remarkably higher than the industry averages of 1.20%, 2.37%, and 0.02%, respectively.

POWR Ratings Reflect Promising Outlook

AVGO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an A grade for Quality, consistent with higher-than-industry profitability margins. It also has a B grade for Sentiment, in sync with favorable analysts’ estimates.

In the 90-stock Semiconductor & Wireless Chip industry, AVGO is ranked #12.

Click here for the additional POWR Ratings for AVGO (Value, Momentum, Stability, and Sentiment).

Bottom Line

By the introduction of the Sian™ BCM85822, a 5nm 200G/lane optical PAM-4 DSP PHY, AVGO aims to cater to the evolving needs of data centers, positioning itself as a key player in the industry. Moreover, its new launches and partnerships reflect AVGO’s commitment to innovation and addressing competition.

Additionally, AVGO boasts an attractive valuation and robust profitability metrics, These factors, along with its solid financial performance in the recent quarter, steady dividend-paying history, and favorable analysts’ estimate, present the stock as a solid buy this month.

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

While AVGO has an overall grade of B, equating to a Buy rating, you may also check out these other stocks within the Semiconductor & Wireless Chip industry:  Renesas Electronics Corporation (RNECF), Everspin Technologies, Inc. (MRAM), and STMicroelectronics N.V. (STM), with an A (Strong Buy) or B (Buy) rating. For exploring more A and B-rated Semiconductor $ Wireless Chip stocks, click here.

What To Do Next?

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AVGO shares were trading at $838.74 per share on Friday afternoon, up $14.88 (+1.81%). Year-to-date, AVGO has gained 52.72%, versus a 13.17% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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