Broadcom Inc. (AVGO) operates as a designer, developer, and supplier of various semiconductor devices, focusing on complex digital, mixed-signal complementary metal oxide semiconductor-based devices and analog III-V-based products globally.

On August 22, AVGO and Tencent Holdings Limited (TCEHY) announced a strategic partnership to accelerate the adoption of high bandwidth co-packaged optics (CPO) network switches for cloud infrastructure. Under the partnership, AVGO would provide the 25.6-Tbps Humboldt CPO switch device, with TCEHY defining the system architecture to develop hardware and software for field deployment.

Over the past year, AVGO’s stock has gained 1.5%. However, it has declined 23.9% year-to-date and 5.4% over the past month to close its last trading session at $506.39.

On the other hand, the four Wall Street analysts that have rated the stock rated it Buy. The 12-month median price target of $660.00 indicates a 30.3% potential upside. The price targets range from a low of $625.00 to a high of $700.00.

Here are the factors that could affect AVGO’s performance in the near term:

Solid Growth

For the fiscal second quarter of 2022, AVGO’s net revenue increased 22.6% year-over-year to $8.10 billion. Non-GAAP net income and non-GAAP earnings per common share rose 34.2% and 37% from the prior-year quarter to $4 billion and $9.07. Its adjusted EBITDA improved 29.1% from the same period the prior year to $5.11 billion.

Wide Profit Margins

AVGO’s trailing-12-month EBITDA margin, net income margin, and levered FCF margin of 56.20%, 29.76%, and 40.34% are 330.1%, 600.6%, and 402.2% higher than their respective industry averages of 13.07%, 4.25%, and 8.03%.

Its trailing-12-month ROE, ROTC, and ROA of 38.43%, 11.31%, and 12.45% are 427.6%, 184%, and 353% higher than their respective industry averages of 7.28%, 3.98%, and 2.75%.

Favorable Analyst Expectations

The consensus EPS estimate of $10.06 for the quarter ending October 2022 indicates a 28.8% year-over-year increase. Likewise, the consensus EPS estimate for the fiscal year 2022 of $36.94 reflects an improvement of 31.9% from the prior year.

Analysts expect revenues for the same periods to rise 17.8% and 19.9% year-over-year to $8.73 billion and $32.90 billion. EPS is expected to increase by 13.6% per annum over the next five years.

POWR Ratings Reflect Promising Prospects

AVGO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

AVGO has a Growth grade of A in sync with its solid growth in the last reported quarter. The stock also has an A grade for Quality, consistent with its broad profitability margins.

AVGO has a Sentiment grade of B. Favorable analyst expectations justify this grade.

In the 95-stock Semiconductor & Wireless Chip industry, it is ranked #6. The industry is rated B.

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

View all the top stocks in the Semiconductor & Wireless Chip industry here.

Bottom Line

The commercialization of the CPO network switches should bolster AVGO’s top line. In addition, the company possesses solid fundamentals. Also, analysts see significant upside potential in the stock. Thus, I believe the stock might be a solid buy for the long term.

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

While AVGO has an overall POWR Rating of A, one might consider looking at its industry peers, STMicroelectronics N.V. (STM) and Photronics, Inc. (PLAB), which also have an overall A (Strong Buy) rating.

AVGO shares were trading at $501.85 per share on Wednesday morning, down $4.54 (-0.90%). Year-to-date, AVGO has declined -23.44%, versus a -15.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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