Broadcom (NASDAQ: AVGO) stocks have delivered impressive gains of 43% so far in 2024, outpacing 22% of the previous year’s gains PHLX Semiconductor Sector index this year, which isn’t surprising given that the semiconductor giant has delivered solid quarterly results recently, thanks to growing demand for its custom chips.
Artificial intelligence (AI) is playing a central role in boosting Broadcom’s business. Specifically, Broadcom said in June that it was on track to generate more than $11 billion in revenue from AI chip sales this year. However, a closer look at the company’s recent quarterly results shows that AI revenue could be coming in at a higher level, which is why investors who haven’t yet bought into the semiconductor stock should consider buying shares before it releases its earnings report on Thursday.
Broadcom stock could make investors optimistic on September 5
Broadcom is scheduled to report its fiscal 2024 third-quarter results on Sept. 5 after markets close. Analysts expect earnings of $1.20 per share on revenue of $12.96 billion.
The revenue estimate shows that the company’s revenue is expected to grow 46% year-over-year, largely due to the acquisition of VMware, which closed in November 2023.
Investors should note, however, that Broadcom has beaten Wall Street’s profit expectations in each of the last four quarters. What’s more, the company raised its fiscal 2024 revenue forecast to $51 billion when it last reported a profit, from the previous forecast of $50 billion, driven by stronger-than-expected demand for its AI chips.
Broadcom makes custom AI processors, known as application-specific integrated circuits, which are reportedly being deployed by big tech companies to train and deploy AI models. At the same time, the company’s networking business has also gotten an AI-driven boost, with demand for its Ethernet switches surging to meet growing demand for high-speed connectivity in data centers to support AI workloads.
More specifically, Broadcom’s AI revenue grew by an impressive 280% year over year in the previous quarter. There’s a good chance the company can sustain that tremendous growth in both the short and long term.
Harlan Sur from JPMorgan predicts that Broadcom’s cumulative AI revenue will reach an impressive $150 billion over the next four to five years, which could grow the company’s semiconductor revenue at an annual rate of 30% to 40%.
Broadcom derives 58% of its revenue from semiconductor chip sales. This business generated $7.2 billion in revenue in fiscal Q2, which translates to annual revenue of nearly $29 billion. With $3.1 billion in revenue from AI chip sales in the second quarter, 43% of Broadcom’s semiconductor sales came from this fast-growing technology.
A $150 billion revenue opportunity suggests that Broadcom’s semiconductor revenue is likely to grow significantly over the long term. It won’t be surprising, then, to see the company raise its full-year guidance again when it reports results on Sept. 5, especially as it has expanded its customer base for custom AI processors and is ramping up production for a third customer this year.
A better-than-expected set of results along with different guidance would likely give Broadcom stock a boost, which may be why it’s a good idea to buy ahead of upcoming results given its valuation. It doesn’t make sense to try to time the market and buy to take advantage of a short-term price increase, but I think the stock is worth holding on to for years to come.
The stock looks like an attractive bet based on this forward-looking valuation metric
Broadcom’s trailing valuation multiples are expensive. The stock trades at 17 times revenue and 72 times earnings. However, the forward earnings multiple of 27, based on earnings estimates, suggests a big jump in the bottom line. The company is expected to post earnings of $4.75 per share this year, which would be a modest increase from last year’s $4.22 per share. But as the following chart shows, bottom line growth is expected to improve.
The expected acceleration in Broadcom’s earnings growth explains why the stock’s price-to-earnings-growth ratio (PEG ratio) is 0.76.
The PEG ratio is a forward-looking valuation metric calculated by dividing a company’s earnings multiplier by the expected earnings growth it could deliver. A value of less than 1 is considered an undervalued stock given the growth it could deliver, and the chart above shows that Broadcom is an attractive stock to buy based on its potential growth.
Investors looking to add a growth stock to their portfolio would do well to buy Broadcom before the results are released. A good set of numbers will likely send the stock higher. They can then hold the company for the long term.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Should You Buy Broadcom Stock Before September 5? was originally published by The Motley Fool
