Is Broadcom Stock a Buy, Sell, or Fairly Valued After Earnings?

Broadcom, a leading chipmaker, recently released its first-quarter earnings report. The company’s stock has more than doubled in value over the past year, with Morningstar analyzing its performance and outlook.

According to Morningstar, Broadcom’s results were mostly in line with expectations, with the company reaffirming its full-year sales guidance. The company raised its revenue expectations for artificial intelligence in fiscal 2024, offsetting weakness in other markets. The AI segment is expected to account for 20% of total sales in fiscal 2024, becoming a key driver for the company in the coming years.

Despite the positive outlook for Broadcom’s AI opportunity, Morningstar believes the stock is overpriced and overvalued. To justify its current valuation, AI sales would need to grow at a compound annual rate of 50% through fiscal year 2028, reaching $50 billion. Morningstar forecasts $30 billion in AI sales by fiscal year 2028.

Morningstar’s fair value estimate for Broadcom is $1,090.00, with a 2-star rating indicating that the stock is overvalued compared to the long-term fair value estimate. The company’s primary drivers of valuation include its networking business, operational leverage from VMware, and anticipated long-term growth.

Broadcom has a competitive advantage in chip design and switching costs of its software products, giving it a broad economic moat. The company’s business is focused on semiconductors, with a strong presence in enterprise networking, wireless chips, broadband access, and storage applications.

However, Broadcom faces medium uncertainty due to its vulnerability to supply and demand cycles as a chipmaker. The company is highly dependent on Taiwan Semiconductor Manufacturing for its chips, posing a risk in case of supply constraints.

AVGO bulls highlight Broadcom’s operational efficiency, strong margins, and cash flow generation. The company’s wireless chip and networking businesses boast best-in-class technologies and relationships with leading customers.

On the other hand, AVGO bears point out Broadcom’s exposure to non-moaty businesses, such as broadband and storage chips. The company’s software portfolio includes traditional, mature businesses with lower growth potential. Broadcom’s reliance on acquisitions for portfolio expansion may not always lead to strategic synergies.

Overall, Broadcom’s performance in the AI sector and its competitive positioning in chips and software make it a key player in the industry. However, the company faces challenges in maintaining growth and managing risks associated with its supply chain and business portfolio.

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https://www.morningstar.com/stocks/after-earnings-is-broadcom-stock-buy-sell-or-fairly-valued