Amid AI-Fueled Growth, AVGO Stock's Valuation Raises Concern

Forbes

12 hours ago

CANADA - 2025/01/06: In this photo illustration, the Broadcom company logo is seen displayed on a ... More smartphone screen. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images)
Broadcom (NASDAQ: AVGO) announced robust results for the second quarter of fiscal 2025 (ending in October), exceeding consensus estimates for both revenue and earnings. The company reported $15.0 billion in revenue, a 20% year-over-year increase, and adjusted earnings of $1.58 per share, up 44% year-over-year. These figures slightly surpassed analyst expectations of $14.97 billion and $1.57, respectively.
This growth was primarily fueled by strong demand for Broadcom's AI semiconductor solutions and contributions from VMware. AI revenue alone surged by 46% year-over-year to over $4.4 billion in Q2, driven by robust demand for AI networking. Alongside impressive sales growth, the company's adjusted EBITDA margin significantly expanded by 700 basis points year-over-year, reaching 66.7% in Q2.
Broadcom's outlook for Q3 also appears promising, with anticipated sales of $15.8 billion, slightly ahead of the $15.7 billion consensus. The company expects growth in AI semiconductor revenue to accelerate to $5.1 billion in Q3, with an adjusted EBITDA margin of at least 66%.
Despite these solid results, AVGO stock saw a 4% decline in after-market trading on Thursday, June 5. This dip can partly be attributed to the stock's already high valuation.
The question for investors is whether to buy AVGO stock at its current price of around $250. This is a tricky decision. While the stock appears attractive, its high valuation makes it particularly susceptible to adverse events, leading to potential volatility.
Our analysis, which compares AVGO's current valuation to its recent operating performance and financial health, suggests minimal underlying concerns. Broadcom exhibits a very strong operating performance and financial condition across key parameters, including growth, profitability, financial stability, and downturn resilience. However, if you seek upside with less volatility than a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception. Separately, see – Is Amazon Stock Still A Buy After Its Recent 25% Rally?
Going by what you pay per dollar of sales or profit, AVGO stock looks very expensive compared to the broader market.
Broadcom's Revenues have grown considerably over recent years.
Broadcom's profit margins are much higher than most companies in the Trefis coverage universe.
Broadcom's balance sheet looks strong.
AVGO stock has fared worse than the benchmark S&P 500 index during some of the recent downturns. While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
In summary, Broadcom's performance across the parameters detailed above is as follows:
- Growth: Extremely Strong
- Profitability: Very Strong
- Financial Stability: Strong
- Downturn Resilience: Neutral
- Overall: Strong
Even though the stock has performed strongly in the parameters discussed, its extremely high valuation supports our conclusion that AVGO is a tricky stock to buy. We think investors would likely be better off waiting for a further dip before picking AVGO stock. Notably, the average analyst price estimate of $254 also suggests that the stock does not have significant room for growth.
Of course, we could be wrong, and investors may continue to assign even higher valuation multiples to AVGO stock given its position in the AI boom. Sometimes, valuations take a back seat when investors get eager about the outlook. In fact, evaluating valuation contextually is just one of many approaches we take when constructing the Trefis High Quality (HQ) Portfolio. This portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last four years. This is because, as a group, HQ Portfolio stocks have provided better returns with less risk compared to the benchmark index, offering a less volatile investment experience, as evident in the HQ Portfolio's performance metrics.