Is this a buying opportunity?
Broadcom (NASDAQ:AVGO) stock is an AI superstar that has generated triple-digit returns in each of the last two years and is one of the few tech giants that is beating the market this year, up about 9%.
The company, which makes AI chips for mobile and broadband networks, had another strong quarter, posting record revenue in its fiscal second quarter on Thursday after the closing bell. It also topped earnings estimates in the quarter.
However, the stock price was down about 3% in early trading on Friday, dropping to about $257 per share. Is this a buying opportunity for investors?
Record Q2 revenue
Broadcom generated record revenue of $15 billion, up 20% year over year. That squeaked past estimates of $14.99 billion.
Net income was $4.96 billion, or $1.03 per share, up 134% year over year. Adjusted net income was up 44% to $7.8 billion, or $1.58 per share. Analysts expected earnings of $1.56 per share.
So, while Broadcom had record revenue and beat estimates, maybe investors were expecting more. Such are the circumstances for AI juggernauts – good is often not good enough.
Broadcom’s AI chips continue to drive revenue.
“Q2 AI revenue grew 46% year-over-year to over $4.4 billion driven by robust demand for AI networking,” said Hock Tan, president and CEO of Broadcom. “We expect growth in AI semiconductor revenue to accelerate to $5.1 billion in Q3, delivering ten consecutive quarters of growth, as our hyperscale partners continue to invest.”
Tan noted that the 20% growth is not skewed by the acquisition last year of VMWare, which produces virtualization software. VMWareʻs first quarter with Broadcom was Q2 of 2024, so the year-over-year numbers are apple-to-apples.
The company also reported $6.4 billion in free cash flow, up 44% year over year. It represents 43% of revenue. Free cash flow is an important metric because it means the company is generating cash after expenses and has liquidity to invest in new initiatives, navigate downturns, or fund dividends.
In the case of the latter, Broadcom declared a 59 cent per share dividend for the current quarter. Broadcom has increased its dividend for 1`4 straight years.
Is Broadcom stock a buy?
For the third fiscal quarter, Broadcom expects revenue of $15.8 billion, which would be another record and would be up 5% from the previous quarter. That is slightly higher than the Street’s estimate of $15.7 billion.
Of that total, Broadcom expects $5.1 billion in AI semiconductor revenue, which would be 16% higher than the previous quarter.
Further, the company is targeting adjusted EBITDA that is at least 66% of revenue. In the previous quarter the adjusted EBITDA was $10 billion, or 67% of revenue.
While investors were disappointed in the results, Wall Street analysts were not, as the stock got several price target upgrades. One of the biggest bumps came from TD Cowen which raised its target by $90 to $290 per share, based largely on its strong AI growth. That would represent a 15% increase over the current share price.
Broadcom stock has a median price target of $266 per share, which suggests a 6% return.
The likely reason for the selloff is Broadcom’s high valuation, trading at 96 times earnings. That’s down from 171 times earnings in January, but still high. Perhaps the outlook was not enough to justify the high valuation. Broadcom is a great company and an excellent long-term holding, but investors may want to wait for a better entry point.
