Market Capitalization: $797.08 Billion
Shares Outstanding: 4.67 Billion
Sector: Technology
Industry: Semiconductors
Analysis as of: October 2, 2024

 

1. Company Overview

Broadcom Inc. (NASDAQ: AVGO) is a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions. Founded in 1961 and headquartered in Palo Alto, California, Broadcom serves a diverse set of customers across multiple markets, including data center, networking, software, broadband, wireless, storage, and industrial.

Key Business Segments:

• Semiconductor Solutions: Offers a wide array of semiconductor products for applications in data centers, networking, broadband, wireless, storage, and industrial markets.
• Infrastructure Software: Provides software solutions for data center, mainframe, cybersecurity, and enterprise software segments.

Broadcom’s products are integral to the technology infrastructure that supports modern digital ecosystems.

2. Financial Performance

a. Revenue and Growth

• Trailing Twelve Months (TTM) Revenue: $46.82 Billion
• Year-over-Year (YoY) Revenue Growth (TTM): +32.04%

Revenue Trend:

Fiscal Year	Revenue (in Billions)	YoY Growth
FY 2019	$22.60	+8.39%
FY 2020	$23.89	+5.71%
FY 2021	$27.45	+14.91%
FY 2022	$33.20	+20.96%
FY 2023	$35.82	+7.88%
TTM 2024	$46.82	+32.04%

Analysis:

Broadcom has demonstrated strong revenue growth over the past several years, with the TTM revenue increasing by 32.04%. This significant growth is likely driven by increased demand for semiconductor products and infrastructure software solutions, reflecting the company’s strategic positioning in high-growth markets such as data centers, networking, and cloud services.

b. Profitability

• Net Income (TTM): $5.10 Billion
• Earnings Per Share (EPS, TTM): $1.10
• Profit Margin: 10.88%
• Return on Equity (ROE): 12.51%

• Return on Assets (ROA): 7.70%
• Return on Invested Capital (ROIC): 9.36%

Analysis:

Despite robust revenue growth, Broadcom’s net income decreased by 63.39% YoY. The significant drop in net income is primarily due to a substantial increase in the effective tax rate, which rose to 45.78% from 6.72% in the previous fiscal year. The higher tax expense has adversely impacted profitability, leading to a decrease in EPS by 66.44%.

The profit margin declined to 10.88%, and the ROE decreased to 12.51%, indicating reduced efficiency in generating profits from shareholders’ equity compared to previous years.

c. Cash Flow

• Operating Cash Flow (TTM): $19.19 Billion (+7.54% YoY)
• Capital Expenditures (CapEx, TTM): -$531 Million
• Free Cash Flow (FCF, TTM): $18.66 Billion (+7.39% YoY)
• Free Cash Flow Margin: 39.85%
• Free Cash Flow Per Share: $3.99

Analysis:

Broadcom continues to generate strong operating cash flow, with a 7.54% increase YoY. Free cash flow also increased by 7.39%, providing the company with substantial liquidity to fund operations, reduce debt, pay dividends, and potentially pursue strategic acquisitions.

d. Balance Sheet

• Total Assets: $167.97 Billion
• Total Liabilities: $102.32 Billion
• Total Debt: $69.96 Billion
• Cash & Equivalents: $9.95 Billion
• Net Debt Position: – $60.01 Billion
• Net Cash Per Share: – $12.85
• Equity (Book Value): $65.65 Billion
• Debt-to-Equity Ratio: 1.07
• Current Ratio: 1.04
• Quick Ratio: 0.84

Analysis:

Broadcom has a substantial amount of debt, with a total debt of $69.96 billion and a net debt position of $60.01 billion. The debt-to-equity ratio of 1.07 indicates that the company uses a significant amount of leverage. The current ratio of 1.04 and quick ratio of 0.84 suggest that the company’s short-term liquidity is adequate but should be monitored, especially given the high debt levels.

3. Valuation

• Price-to-Earnings (PE) Ratio (TTM): 144.43

• Forward PE Ratio: 28.81
• Price-to-Sales (PS) Ratio: 16.36
• Price-to-Book (PB) Ratio: 12.14
• Price-to-Free Cash Flow (P/FCF) Ratio: 42.73
• PEG Ratio: 1.49

Analysis:

• PE Ratios: The trailing PE ratio of 144.43 is significantly high due to the sharp decline in net income caused by the increased tax expense. The forward PE ratio of 28.81 suggests that analysts expect earnings to recover in the future.
• PS and PB Ratios: The PS ratio of 16.36 and PB ratio of 12.14 indicate that the stock is trading at a premium compared to its sales and book value.
• PEG Ratio: A PEG ratio of 1.49 suggests that the stock’s price is aligned with its expected earnings growth, implying reasonable valuation relative to growth prospects.

4. Market Performance

• Current Stock Price: $170.66
• 52-Week Range: $81.17 – $185.16
• 52-Week Price Change: +105.47%
• Beta: 1.18
• Dividend Yield: 1.24%
• Ex-Dividend Date: September 19, 2024

Analysis:

Broadcom’s stock price has more than doubled over the past year, reflecting strong investor confidence and positive market sentiment. The beta of 1.18 indicates that the stock is more volatile than the overall market. The dividend yield of 1.24% provides an additional return to shareholders.

5. Financial Health and Risks

a. Liquidity

• Current Ratio: 1.04
• Quick Ratio: 0.84

Analysis:

The current ratio slightly above 1 indicates that Broadcom can meet its short-term obligations. However, the quick ratio below 1 suggests that, after excluding inventories, the company’s liquid assets may not be sufficient to cover current liabilities, indicating potential liquidity risk.

b. Leverage

• Debt-to-Equity Ratio: 1.07
• Debt-to-EBITDA Ratio: 3.03
• Interest Coverage Ratio: 4.29

Analysis:

Broadcom has a high level of debt relative to equity and earnings. The debt-to-EBITDA ratio of 3.03 implies significant leverage, which can be risky if earnings decline or interest rates rise. The interest coverage ratio of 4.29 indicates that the company can cover its interest expenses, but the margin is not very wide.

c. Profitability Concerns

• Decline in Net Income: The substantial decrease in net income and EPS due to the high effective tax rate is a concern.
• Tax Expense: The effective tax rate increased to 45.78% from 6.72%, significantly impacting net earnings.

d. Operational Risks

• Integration Risks: Broadcom has a history of acquisitions; integrating acquired companies poses operational challenges.
• Market Competition: The semiconductor industry is highly competitive, with rapid technological changes and intense pricing pressure.
• Supply Chain Issues: Global semiconductor shortages and supply chain disruptions can affect production and delivery.

e. Market Risks

• Economic Conditions: Broadcom’s business is sensitive to global economic conditions and capital spending by customers.
• Regulatory Risks: Changes in trade policies, tariffs, and export controls can impact operations.
• Customer Concentration: Dependence on a few large customers may pose revenue risks if relationships change.

6. Conclusion

Pros:

• Strong Revenue Growth: Broadcom has achieved significant revenue growth, indicating robust demand for its products and services.
• Leading Market Position: The company is a leader in key technology segments with a diversified product portfolio.
• Cash Flow Generation: Strong operating and free cash flow provide financial flexibility for debt reduction, dividends, and strategic initiatives.
• Dividend Growth: Broadcom has a history of increasing dividends, with a 13-year streak of growth.

Cons:

• Decreased Profitability: A significant drop in net income and EPS due to a high effective tax rate raises concerns about profitability.
• High Debt Levels: Substantial debt increases financial risk, especially in a rising interest rate environment.
• Valuation Concerns: High valuation multiples, including a PE ratio of 144.43, suggest that the stock may be overvalued based on current earnings.
• Liquidity Risk: Lower quick ratio indicates potential challenges in meeting short-term obligations without relying on inventory sales.
• Market Volatility: The stock’s high beta and significant price appreciation may indicate higher volatility and risk.

Disclaimer:

This analysis is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. Investing in stocks involves risks, including the potential loss of principal. Past performance is not indicative of future results. Investors should conduct their own research or consult a qualified financial advisor before making investment decisions.