Shares of Broadcom Inc. NASDAQ: AVGO soared 15.3% in the after-market hours of Wednesday evening. The reaction came after the company reported its second quarter 2024 financial results, which were better than expected, to say the least. Some in the financial markets thought that only technology stocks like NVIDIA Co. NASDAQ: NVDA were worthy of attention, but they were wrong.
(As of 06/12/2024 ET)
- 52-Week Range
- $795.09
▼
$1,505.80
- Dividend Yield
- 1.40%
- P/E Ratio
- 55.43
- Price Target
- $1,371.04
NVIDIA stock gets more media exposure, but Broadcom is showing the type of financial growth that would warrant similar headlines, giving investors a new reason to stick with it. In fact, investors will soon find an unexpected twist in how markets have begun to prefer Broadcom over its peers in the semiconductor industry.
Backed by a solid fundamental thesis in rising artificial intelligence demand, Broadcom stock has surpassed all of today’s analyst price targets, putting the ball on Wall Street’s court to adjust how the stock is perceived within the banks. One thing is sure, as long as Broadcom’s customers are still in business, shareholders have a reason to watch it.
Broadcom’s Quarterly Results: What Investors Need to Focus On
Current ISM manufacturing PMI index trends show that the electrical equipment sector, including electronics that rely on Broadcom’s chips, contracted in the past month. This should have been enough to make Broadcom shareholders’ stomachs churn.
- Dividend Yield
- 1.40%
- Annual Dividend
- $21.00
- Annualized 3-Year Dividend Growth
- 12.58%
- Dividend Payout Ratio
- 77.84%
- Next Dividend Payment
- Jun. 28
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However, some may have underestimated the company’s current positioning in the market, of which Broadcom is very well positioned by serving clients like Apple Inc. NASDAQ: AAPL and Samsung Electronics Co. OTCMKTS: SSNLF, which allowed for an explosive jump.
Revenue grew by an impressive 43% in the past 12 months, mainly attributed to a record $3.1 billion within the A.I. division for the quarter. For Broadcom’s second-largest segment, VMware clients were quoted to have an accelerating adoption rate over the quarter.
Due to these trends, management confidently raised its 2024 guidance to $51 billion in revenue with EBITDA margins up to 61%. But here’s what matters most for investors: it is the one financial metric to keep funding future growth.
Free cash flow (operating cash flow minus capital expenditures) jumped by 18% over the year, reaching $5.3 billion. With this free cash flow, Broadcom’s management rewarded shareholders with a $5.25 a share dividend for an annualized dividend of roughly 1.2%.
Broadcom Stock Rides High on Bullish Market Sentiment
Following this recent financial momentum, markets have a new reason to be bullish on stocks, and investors can gauge just how bullish markets have become by following two metrics.
The first one is price action, which is already covered now that Broadcom stock is reaching a new all-time high after earnings. The second metric is how markets perceive the company’s future earnings today, which can be measured with the forward P/E ratio.
Compared to peers like Taiwan Semiconductor Manufacturing Co. NYSE: TSM, Broadcom stock’s 25.7x forward P/E commands a premium valuation of roughly 13.3% over Taiwan’s 22.7x, meaning markets are willing to pay a higher price to have access to Broadcom’s future EPS.
Markets are willing to overpay for Broadcom because of its expected EPS growth rates for the next 12 months. Analysts think Broadcom could see up to 32% EPS growth this year, compared to Taiwan Semiconductor’s projections of only 24.5%.
Now that management has also boosted its revenue guidance for Broadcom this year, the stock is trading at a premium to the semiconductor industry on a price-to-sales (P/S) basis. Its 19.4x multiple is 44.7% higher than the industry’s 13.4x average multiple.
Broadcom Stock’s 10 to 1 Split Just Made it More Affordable for Investors
If a $1,700 price tag is too high for investors to afford, management kept those with a tighter budget in mind when announcing a 10 to 1-stock split.
No, this does not make Broadcom more or less valuable in the open market; it simply lowers the stock price for shareholders by adjusting the outstanding shares. The same strategy was recently used by NVIDIA in its own stock split, bringing the current price to less than $130 a share.
This new stock price can attract more investors who were once on the sidelines waiting to save up to afford a significant enough position in Broadcom stock.
Historically, because of these new affordable levels, split stocks tend to outperform the market in the coming months. While history may not necessarily repeat itself, the stars could line up for Broadcom stock.
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