How High Can Broadcom Stock Go?

Semiconductor stocks have been red-hot over the past few years. Nvidia has led that charge and is now trading higher by more than 1300% from where it was 5 years ago. The AI gold rush has been a major factor in those gains, and any chipmaker with an AI stake has received plenty of attention.

Broadcom (NASDAQ: AVGO) isn’t as widely known as Nvidia, but speculation has grown about its prospects. The semiconductor company’s stock has shot up by over 112% in the past year alone. Now trading at over $1200 per share, will AVGO continue to steamroll higher?

Broadcom has been aggressive in making acquisitions that have substantially expanded the company’s offerings. The latest being the November 2023 acquisition of VMware, a major cloud-computing company for $69 billion. It also bought Symantec, the security software company in 2019.

With a product line that supports three of the hottest segments in the tech industry (smartphones, cloud computing, and AI), it’s easy to see why there’s so much buzz surrounding Broadcom.

In addition, AVGO began paying a dividend a little over a year ago, and it just raised it by 14% in the 3rd quarter. But with all the good news around the company, some investors fear that the share price has run too far too fast.

So what does the future hold for Broadcom?

How High Can Broadcom Stock Go?

According to analysts, Broadcom stock is 1% overvalued at this time with fair value sitting at $1,157 per share.

Nonetheless of the 32 analysts covering the stock, 22 rate it as a Buy. The remaining 10 analysts assess it as a Hold.

Analysts seem to think the big gains are over with the highest forecast pegging a 9.4% hike over the next year to $1325 per share.

Still, no sell ratings exist, though the lowest forecast sees the stock dropping by 21.6% to $950 over the next year.

Broadcom’s Acquisitions Have Stunned

One of the main deals for the company was the 2016 acquisition of Broadcom itself by Singapore-based Avago. The $37 billion deal was the biggest chipmaker merger ever at the time.

Avago then changed its name to Broadcom and moved its headquarters from Singapore to San Jose, CA. The combined company has become the third largest chipmaker in the US, and counts Apple and Samsung among its customers.

Before the merger, Broadcom had been almost solely chip manufacturer for cell phones, though its revenue growth had stagnated. Subsequent to the merger, the stock didn’t exactly pop. In fact, AVGO topped out at around $175 by the end of the year. Then it started a bull run into 2020 and even the slight pullback in 2022 as a result of the technology industry’s struggles was short-lived.

After the stock bottomed out at $425 in October 2022, AVGO has been on a tear. It’s now up 184% from that low, including an 11.5% increase through the first few weeks of 2024. Broadcom now has a market capitalization of over $567 billion.

Will Broadcom Stall with Headwinds?

The company’s 3rd quarter of 2023 earnings release didn’t show many signs of weakness. Revenue of $9.3 billion was up 4% from the same quarter of 2022 and slightly eclipsed analysts’ estimates by 0.2%.

The company makes most of its money from semiconductor sales, which account for 79% of the business. The other 21% of revenue comes from infrastructure software, but that segment is growing the fastest. Infrastructure sales were up 7% in the 3rd quarter versus 3% growth in semiconductor revenue.

Net income of $3.5 billion meant that diluted earnings per share were reported at $8.25 in the quarter. EPS was also modestly above analysts’ expectations.

Broadcom’s success led it to an increase in its dividend in the Q3. Now offering a quarterly payout of $5.25 per share, the stock’s annual dividend yield is 1.73%. Part of the reason the Board of Directors has increased the dividend is the higher expected revenue after the VMware acquisition.

Is Broadcom Stock a Bargain?

AVGO share price rose faster than expected over the last month or so, which is likely why the analysts’ ratings are underwhelming at this point and also why some investors believe AVGO is overvalued.

The firm’s price-to-earnings multiple now sits at 40.6x, suggesting future growth is priced in. Many tech companies average around 30x, though the highly popular Nvidia has a P/E o of 78.5x.

Even after AVGO’s gains, there is a case that the stock has room to rise. The company is well positioned to take advantage of an AI industry that’s expected to rise at a rapid rate.

Broadcom is also poised to grow in the semiconductor market. The company signed a multibillion-dollar deal with Apple in May that will keep Broadcom’s top customer in tow for years to come. And the VMware acquisition means the company now has a broader stake in cloud software.

Is Broadcom Stock a Buy or Sell?

Broadcom is well-positioned in the smartphone, AI, and cloud segments. The company’s CEO Hock Tan has made aggressive acquisitions and the VMware merger is unlikely to be the last one. That could become a concern if management overreaches in its expansion efforts.

The other concern is the increase in debt and share count the company undertook to fund its moves. If the VMware acquisition doesn’t pay off as expected, it could tarnish the luster of AVGO.

But even at this price point, there are plenty of reasons to believe that Broadcom shares can rise higher. The company’s weaknesses don’t stack up to its potential growth in several booming segments.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.