Broadcom (NASDAQ:AVGO) is one of the leading semiconductor stocks in the AI industry and has been a big beneficiary of the AI rally. However, as Wall Street sours on the AI narrative, the stock is following the rest of the pack and declining. It has declined over 21% despite promising trends and catalysts in the coming months. Should you buy, or should you stay away? Let’s take a look.
AVGO stock may look very expensive on the surface at 153 times trailing earnings, but it trades pretty reasonably for a fast-growing AI stock when you account for projected earnings. It trades at 31 times forward earnings as of writing.
This is above the 27 times forward earnings investors currently pay for Nvidia (NASDAQ:NVDA). That said, the growth rates for Broadcom are more stellar, at least if you look at the percentages.
Broadcom’s AI revenue grew 220% to $12.2 billion in fiscal 2024 and now comprises 41% of its total semiconductor revenue. This growth is expected to taper a little and be between $15 billion to $18 billion for fiscal 2025. Broadcom is targeting $60-90 billion in AI revenue by fiscal 2027.
Despite these figures, I do not think AVGO stock is undervalued. Here’s why:
Broadcom has taken on significant debt to fund its VMware acquisition, and while this seems to be calculated and has gone well for the company so far in the short term, that’s still a risk you need to account for when valuing the stock. Its biggest competitor Nvidia has $33 billion in net cash on its balance sheet.
You’ll pay the same premium as NVDA here if you add in two more years of expected earnings.
Despite the recent decline, Broadcom does not appear to be a buy. Even if you discount the debt problem, the company’s AI revenue target seems too steep for it to achieve. Also, acquiring a segment from Intel (NASDAQ:INTC) will add even more debt for speculative AI-related revenue.
Piper Sandler analyst Harsh Kumar estimated a possible sale price of approximately $101 billion for Intel's core x86 business.
The consensus price target of $225 does imply 13.8% upside, but price targets have already started moving slightly lower. Morgan Stanley lowered from $265 to $246 in late January and other analysts may follow suit. AVGO stock also lacks a good margin of safety if you buy right now.
On top of that, a fifth of its revenue comes from China and almost another fifth from Singapore. This leaves it much more vulnerable to export restrictions than almost every other AI semiconductor company.
If the broader AI rally continues, it can still go up. However, NVDA or even AMD (NASDAQ:AMD) look like better recovery bets.
I would wait for Q1 FY2025 earnings before adding more AVGO. It missed Q4 on the top line by 0.05%.
