Broadcom (NASDAQ: AVGO) The stock has gained an impressive 43% so far in 2024, easily outpacing the 22% gain made by PHLX Semiconductor Sector Apple stock has been on a strong run this year, which is no surprise as the semiconductor giant has been posting strong quarterly results recently, thanks to increased demand for its custom chips.
artificial intelligence It plays a pivotal role in boosting Broadcom’s business. More specifically, Broadcom said in June that it was on its way to Generating over $11 billion In revenue this year from sales of AI chips. However, a closer look at the company’s latest quarterly results shows that AI revenue could end up stronger, which is why investors who haven’t bought this semiconductor stock should consider buying it before its earnings report on Thursday.
Broadcom Stock Could Spark Investor Optimism on September 5
Broadcom will report third-quarter fiscal 2024 results on Sept. 5 after markets close. Analysts expect earnings of $1.20 per share on revenue of $12.96 billion.
Revenue estimates indicate that the company’s revenue is on track to rise 46% year-over-year, driven largely by the VMware acquisition it completed in November 2023.
Investors should note, however, that Broadcom has beaten Wall Street earnings expectations in each of the last four quarters. Moreover, the company raised its fiscal 2024 revenue forecast to $51 billion the last time it reported earnings, from a 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 deployed by major tech companies to train and deploy AI models. At the same time, the company’s networking business has also received an AI-driven boost, with demand for its Ethernet switches rising rapidly to meet the growing demand for fast connectivity in data centers to support AI workloads.
More specifically, Broadcom’s AI revenue surged a staggering 280% year-over-year in the previous quarter, and there’s a good chance the company can sustain this massive growth, both in the short and long term.
Harlan Sur of JPMorgan Broadcom’s cumulative AI revenue opportunities over the next four to five years are expected to reach $150 billion, which could help the company grow semiconductor revenue at an annual rate of 30% to 40%.
Broadcom gets 58% of its revenue from selling semiconductor chips. That business generated $7.2 billion in revenue in the fiscal second quarter, which translates to an annualized revenue rate of about $29 billion. With $3.1 billion in revenue from AI chip sales in the second quarter, 43% of Broadcom’s semiconductor sales are attributable to the fast-growing technology.
The $150 billion revenue opportunity suggests that Broadcom’s semiconductor revenue is likely to grow significantly over the long term. So it wouldn’t be surprising to see the company raise its full-year guidance again when it reports results on September 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 combination of better-than-expected results and another guidance boost is likely to give Broadcom stock a morale boost, which is why it may be a good idea to buy the stock ahead of its upcoming results given its valuation. There’s no point in trying to time the market and buy to take advantage of a short-term price spike, but I think the stock is worth holding for years.
The stock looks like an attractive bet based on this forward valuation metric.
Broadcom’s late valuation multiples are expensive. The stock is trading at 17 times sales and 72 times earnings. However, its forward earnings multiple of 27, based on earnings expectations, suggests a big jump in its bottom line. The company is expected to earn $4.75 per share this year, up slightly from last year’s $4.22 per share. But as the chart below shows, its bottom line growth is expected to improve.
The expected acceleration in Broadcom’s earnings growth explains why the stock has a price-to-earnings-to-growth (PEG) ratio of 0.76.
The PEG ratio is a forward-looking valuation measure calculated by dividing a company’s earnings multiple by the expected earnings growth it could achieve. A reading below 1 is a sign that the stock is undervalued given the growth it could achieve, and the chart above shows that Broadcom is an attractive stock to buy based on its potential growth.
As such, investors looking to add growth stocks to their portfolios would do better to buy Broadcom shares ahead of its upcoming results — when a strong set of numbers will likely send its shares higher — and then hold them for the long term.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Harash Chauhan The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends JPMorgan Chase. The Motley Fool recommends Broadcom. The Motley Fool has Disclosure Policy.
Should You Buy Broadcom Stock Before September 5? Originally posted by The Motley Fool