Buy Broadcom as a gift during this deep setback (AVGO)


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Investment thesis

Broadcom (NASDAQ:AVGO) has been a gem during these extreme recession fears, as it continues to post a 5-year total price return of 114.2% and a 10-year return of 1,638.3%, despite a retracement of – 31.35% since the start of the year. Nevertheless, the stock market continued to to be flippant over the past few weeks, proving volatile at the slightest bit of negative news, with the S&P 500 index already plunging three times below its June lows. The latter is also set for another moderate retracement ahead, triggered by FAANG’s underperforming earnings this week and semiconductor stocks ahead.

Combined with 85.5% of analysts projecting another 75 basis point hike at the next Fed meeting by November 2 and likely in December as well, we may unfortunately have a harder time ahead. That is, if the October and November PPI/CPI/Labour Market continues to show sticky inflation rates, as evidenced in September 2022. However, we estimate that most of the Pessimism is already entrenched, as Mr. Market already expects an increase in the terminal rate. beyond 5%, the stock market having already been too battered so far.

Therefore, investors with a higher risk tolerance and a long-term trajectory should certainly take charge of this deep pullback, as the stock will likely rally once the Fed pivots. However, bottom investors who choose to wait for the low $400s could get lucky and be rewarded with bumper dividend yields of 4.51% by FY24, compared to a 4-year average of 3 .23% and an industry median of 1.44%. May the force be with us all.

AVGO proves why it deserves a higher rating ahead

AVGO Revenue ($ Billion), Gross and % EBIT

S&P Capital IQ

In its upcoming FQ4’22 earnings call, AVGO is expected to report revenue of $8.9 billion and an EBIT margin of 61.4%, representing an increase of 5.2% and QoQ in line, respectively. Otherwise, excellent annual growth of 20.1% and 2.2 percentage points, respectively, indicating the company’s impressive operational efficiency so far. In the last twelve months (LTM), the company reported $10.9 billion in operating expenses and $1.19 billion in stock-based compensation, marking a whopping -8.01% moderation and -31.21% sequentially. Naturally, highlighting management’s stellar leadership.

AVGO net income (in billions of dollars) % and EPS

S&P Capital IQ

Improving AVGO’s profitability, with analysts forecasting net revenue of $4.46 billion and net revenue margins of 50.2% in Q4 2022, an increase of 5.18% and relatively in line with QoQ , respectively. Otherwise, a remarkable annual growth of 27.42% and 2.9 percentage points, respectively, despite the more difficult annual comparison of 21.95% growth in FQ4’21. Naturally, we will see the company reporting a higher FQ4’22 EPS of $10.29, indicating an increase of 5.75% QoQ and 31.75% YoY.

AVGO Cash/Equivalents, FCF (in billions of $) %, and Dividends

S&P Capital IQ

AVGO is also expected to improve its free cash flow (FCF) generation by FQ4’22, with an FCF of $4.75 billion and an FCF margin of 53.3%. It indicates excellent QoQ growth of 10.2% and 2.4 percentage points, respectively. Otherwise, an increase of 37.68% and 6.7 percentage points year-on-year, respectively. Impressive, since the company also managed to deleverage by -12.97%, going from peak long-term debt levels of $45 billion in the second quarter of 2020 to $39.16 billion in the third quarter of 2022. That’s also on top of its $6.8 billion dividend payouts and $8.43 billion share buybacks from the LTM, with a healthy war chest of $9.98 billion. dollars in cash and equivalents on its balance sheet in Q3’22.

In the meantime, consensus estimates that AVGO will similarly pay out $4.1 in dividends for the next quarter, indicating a 13.88% year-over-year increase. However, we are more optimistic with a speculative payout of $4.66, assuming another 13.9% upside. We’ll see, as that would indicate an excellent forward yield of 4.09%.

AVGO Projected Revenue, Net Profit (USD Billion) %, EBIT % and EPS

S&P Capital IQ

Over the next three years, AVGO is expected to record revenue and net profit growth at an excellent CAGR of 10.2% and 13.7%, respectively, despite the perceived demand destruction and impending recession. Impressively, the company is still expected to maintain its previous hyper-pandemic growth of 10.2% and 15.3%, as these will also contribute to the continued expansion of its profit margins.

By fiscal 2024, AVGO is expected to post exceptional EBIT and net profit margins of 61.7% and 50.3%, compared to fiscal 2021 levels of 58%/45.8% and fiscal 2019 levels of 52.8%/41.8%, respectively. Thus, naturally increasing its EPS at a CAGR of 15.6% through fiscal 2024, to $43.29, from fiscal 2021 levels of $28.01 and fiscal year 2019 from $21.29.

AVGO Projected FCF (in billions of $) % and Dividends

S&P Capital IQ

In addition, AVGO will also report improved FCF generation with margins of 50.7% in fiscal year 2024, compared to fiscal year 2021 levels of 48.5% and fiscal year levels 2019 by 41%. Thus, naturally increasing its dividend payout to $19.27 by FY2024, indicating an exceptional return of 4.23% then based on current stock prices, compared to its 4-year average of 3.23 % and its sector median of 1.44%.

AVGO YTD share price

AVGO YTD share price

Looking for Alpha

It’s no wonder, then, that AVGO stock has suffered little compared to other semiconductor companies with a -31.35% drop year-to-date, compared to Advanced Micro Devices. (AMD) at 61%, Nvidia (NVDA) at 56.26%, and Intel (INTC) to -50.63% at the same time. This is naturally attributed to the peak levels of FUD in the stock market, rather than its fundamental performance. Drown out the noise.

So is AVGO Stock a buysell or keep?

AVGO 5Y EV/Revenues and P/E Valuations

AVGO 5Y EV/Revenues and P/E Valuations

S&P Capital IQ

AVGO is currently trading at a Revenue EV/NTM of 6.12x and a P/E NTM of 11.30x, below its 5-year average of 6.71x and 14.01x, respectively. Taking into account the brief dip at the start of the COVID-19 pandemic, the stock is currently trading at its lowest P/E valuation point in the last four years, indicating its notable undervaluation. The stock is also trading at $455.40, down -32.80% from its 52-week high of $677.76, but with a 9.55% premium to its low. 52 weeks at $415.07.

Nonetheless, consensus estimates remain bullish on AVGO’s outlook, given their price target of $668.00 and a 46.68% upside from current prices. Who wouldn’t, given its outstanding future profitability?

Therefore, we rate AVGO stock as a buy during this pullback, as it will naturally rally once the Fed pivots. The time may come sooner rather than later, since several market traders are already seeing the first signs of a reversal in inflation rates. Hence, potentially pointing to levels near the bottom of the stock market here. Don’t miss the boat.


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