After Earnings, Is Broadcom Stock a Buy, a Sell, or Fairly Valued?

Broadcom AVGO released its third-quarter earnings report on Dec. 12. Here’s Morningstar’s take on Broadcom’s earnings and stock.

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $190.00
• Morningstar Rating: 2 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Broadcom’s Q3 Earnings

Broadcom reported October-quarter revenue of $14.1 billion, rising 8% sequentially. In the longer term, management estimated the serviceable addressable market for artificial intelligence chips at its three largest customers to be $60 billion-$90 billion in fiscal 2027.

• The bottom line: We raised our fair value estimate for Broadcom to $190 per share from $155 as we raised our AI revenue growth forecast for the firm. We now see shares as roughly fairly valued after a 15% jump after hours in response to strong results and guidance.
  • We now forecast nearly 40% annual revenue growth for Broadcom’s AI chips through fiscal 2029, inclusive of more than 50% annual growth through fiscal 2027. This puts us on the conservative end of management’s SAM. We model $44.2 billion in AI chip revenue in fiscal 2027.
  • To buy Broadcom shares today, we believe investors must believe in the midpoint or upper end of management’s SAM and expect Broadcom to retain a 70% share of this opportunity.
• Why it matters: Broadcom’s SAM estimate for fiscal 2027 implies significantly higher AI revenue growth over the next three years than we expected, at a roughly 62% annual rate from fiscal 2024.
  • We believe Broadcom has a path to a majority share of this future SAM. Management estimates its fiscal 2024 SAM to be $15 billion-$20 billion, which implies Broadcom holds a roughly 70% share with $12.2 billion in fiscal 2024 AI chip revenue.
  • We see potential upside to management’s SAM, given Broadcom has just begun working with two more custom AI accelerator customers (who we believe to be Apple AAPL and OpenAI) and sells its merchant networking chips for AI to a wider customer base.
• Big picture: Broadcom’s impressive outlook for AI revenue adheres to our long-term thesis that the firm possesses differentiated chip design capabilities for high-performance networking and computing that allow it to capitalize on significant cloud investment and take market share.

Fair Value Estimate for Broadcom

With its 2-star rating, we believe Broadcom’s stock is overvalued compared with our long-term fair value estimate of $190 per share. Our valuation implies a fiscal 2025 adjusted price/earnings multiple of 30 times and a fiscal 2025 enterprise value/sales multiple of 15 times.

In our view, Broadcom’s primary valuation drivers are the growth of its AI chip business and its ability to extract growth and operating leverage from VMware. We also anticipate continued inorganic growth over the long term. We model 18% revenue growth for Broadcom through fiscal 2029. We see high artificial intelligence sales driving supernormal growth in the next five years while longer-term durable growth settles at around 10% on an organic basis.

Read more about Broadcom’s fair value estimate.

Economic Moat Rating

We believe Broadcom has a wide moat, stemming from intangible assets in chip design and switching costs for its software products. The firm’s strength in both chips and software lets it earn terrific accounting and economic profits, and we believe its competitive positioning will likely allow it to do so for the next 20 years. Most of the company’s business is in semiconductors, with broad end-market exposure across enterprise networking, wireless chips for smartphones, broadband access, and storage applications. We see the two largest exposures here, networking and wireless chips, benefiting from the firm’s expertise in chip design.

Most of Broadcom’s business is in semiconductors, with broad end-market exposure across enterprise networking, wireless chips for smartphones, broadband access, and storage applications. We see the two largest exposures here—networking and wireless chips—benefiting from the firm’s wide-moat expertise in chip design.

Read more about Broadcom’s economic moat.

Financial Strength

We anticipate Broadcom focusing on strong cash generation. Over the short term, we expect the firm to focus on paying down debt taken out to acquire VMware. Over the long term, we expect it to focus on growing its dividend and bolting on more acquisitions to add to its cash flow. As of October 2024, Broadcom held $9 billion in cash and equivalents versus $68 billion in gross debt, with approximately half of that taken on to finance the 2023 acquisition of VMware. We don’t worry about its debt load, given the long-dated nature of its outstanding notes and its robust cash generation. After Broadcom’s gross debt/adjusted EBITDA ratio rose to 3.5 times after closing on VMware, the firm exited fiscal 2024 with that figure down to 2.1 times.

Read more about Broadcom’s financial strength.

Risk and Uncertainty

We assign a Medium Uncertainty Rating to Broadcom. As a chipmaker, it is vulnerable to market supply and demand cycles. Though it has been able to offset cyclicality in recent years with its software exposure and networking strength as a buoy, future cycles may not look similar. It also heavily relies on Taiwan Semiconductor Manufacturing TSM for its chips, and any supply constraints could hamper its ability to ship to customers. Nonetheless, we believe Broadcom is a preferred customer of Taiwan Semiconductor and would receive high priority in such a scenario, both for its scale and lengthy relationship.

Read more about Broadcom’s risk and uncertainty.

AVGO Bulls Say

• Broadcom is a poster child for operating efficiency. It earns excellent operating margins and generates enormous cash flow. It is particularly strong at acquiring companies and trimming excess expenses.
• Broadcom’s networking and wireless chip businesses boast best-of-breed technologies, along with marquee customer relationships with Apple AAPL, Alphabet, Cisco Systems CSCO, Arista Networks ANET, and others.
• We believe Broadcom will significantly benefit from rising AI spending, which we expect to spur significant growth for its networking semiconductor sales.

AVGO Bears Say

• Broadcom has sizable exposure to non-moaty businesses, like its broadband and storage chips.
• Broadcom’s software portfolio holds many legacy and mature businesses, like virtualization and mainframes, which we think will exhibit lower growth.
• Broadcom relies heavily on acquisitions to expand its portfolio, yet tends to focus more on expense cutting rather than seek strategic synergies for its deals.

This article was compiled by Kayleigh Hall.