Broadcom Inc (AVGO)

Conclusion

Broadcom Inc designs semiconductor devices for networking, wireless, storage and broadband, including AI networking, and sells infrastructure software such as VMware Cloud Foundation and cybersecurity products. At 319.48 USD per share, the market capitalisation is 1,525.1 billion USD and the enterprise value is 1,560.5 billion USD.

The verdict is overvalued. EV/EBITDA of 29.8 sits above its ten-year median of 19.9, price to free cash flow of 38.7 above 20.4, price to sales of 17.1 above 7.4 and price to book of 15.3 above 9.0. Only the P/E of 39.9 is below its median of 49.1. The DCF gives 164.75 USD per share at a discount rate of 12.41%. The fair value band runs from 141.12 to 211.68 USD with a midpoint of 176.40 USD, a margin of safety of -44.8% at the current price. The reverse DCF implies revenue-type growth of 25.2% a year, against revenue growth of 21.7% a year over five years and free cash flow per share growth of 15.0%.

The strongest numbers are the operating margin of 48.4% against a ten-year median of 25.4%, ROIC of 32.3% against a WACC of 12.15%, and free cash flow conversion of 103.0% over the last twelve months. The weakest are the price relative to the fair value band, with a margin of safety of -44.8%, the implied growth of 25.2% that exceeds the growth delivered, and a share count that has risen 2.9% a year over five years.

Financial health

Financial strength is green, held up by an interest coverage of 14.0x, net debt to EBITDA of 0.68 and a current ratio of 2.50, all assessed as good. The quick ratio is 1.81 and debt to equity is 0.60. The Altman Z-score is 11.9, in the safe zone, although that model was designed for manufacturers and only partly fits a semiconductor company. Insolvency risk: low, about 0.08% by the estimate of the Ohlson model over one to two years. Debt has fallen 12.1% a year relative to revenue growth over five years, so leverage has not been a growing burden.

Earnings quality

Earnings quality is green. Piotroski scores 8 of 9 and free cash flow conversion is 153% over five years, with 103.0% over the last twelve months. The accrual ratio of -2.6% means reported earnings are backed by cash. Stock-based compensation is 9.5% of revenue, and free cash flow after it is 30.9 billion USD. The share count has grown at 2.9% a year over five years, so there have been no net buybacks. The Beneish M-score is not available. Broadcom has beaten its estimates in all of the last eight quarters, by 3.1% on average. Estimate revisions are flat to slightly mixed, with the current year up 0.3% over 90 days and next year down 0.6%.

Profitability

Profitability is green. Gross margin is 68.8% against a ten-year median of 59.0%, operating margin 48.4% against 25.4%, and net margin 42.9% against 18.5%. Operating margin has been relatively stable, with a stability measure of 57.1%. ROIC of 32.3% is 20.1 percentage points above the WACC of 12.15%, and five-year median ROIC is 19.9%. Return on equity is 38.4%. The DuPont split shows a net margin of 36.2%, an asset turnover of 0.37 and an equity multiplier of 2.1x, so the return comes mainly from margins rather than leverage.

Growth

Growth is green. Revenue has compounded at 24.4% over three years, 21.7% over five years and 25.1% over ten years. Earnings per share compounded at 20.6% over three years and 46.6% over five years, and free cash flow per share at 12.9% and 15.0%. Revenue grew in all 10 of the last 10 years. Analysts expect earnings per share to rise 66.9% next year. Growth has been strong and consistent, but the three-year figures are below the five-year ones for earnings, so the recent pace is slower than the long-run average.

Valuation

Valuation is red. Multiples are above their ten-year medians except P/E: EV/EBITDA is 49.5% above its median, price to free cash flow 90.1%, price to sales 132.2% and price to book 69.9%, while P/E is 18.8% below its median. The DCF gives 164.75 USD per share at a discount rate of 12.41%, with about half of its value in the terminal value. The fair value from historical multiples is 188.05 USD. The fair value band runs from 141.12 to 211.68 USD, midpoint 176.40 USD, and the margin of safety is -44.8%. The reverse DCF implies growth of 25.2%, 3.4 percentage points above five-year revenue growth. The dividend yield is 0.8% and the payout on free cash flow is 30.7%.

Risks

The main risk is valuation. If growth slows toward the 15% to 22% delivered over five years, the implied 25.2% would not be reached and the fair value band would be the reference point. Operating margin is far above its history, so any normalisation would weigh on the DCF. Stock-based compensation at 9.5% of revenue and a rising share count reduce the value left for shareholders. The beta of 1.51 means the stock can move sharply. Not available: the Beneish M-score and the debt maturity schedule. This analysis does not include revenue by segment or debt maturities, so it cannot test concentration or refinancing risk.