Thesis
In a prior article discussing Broadcom Inc. (NASDAQ: AVGO), I highlighted the substantial upside potential following a 26% rally preceding the article. While two Dividend models indicated the property was fairly valued, an optimistic model suggested a reasonable price 34.8% higher than the stock price at that time. This analysis followed the Q4 2023 profits announcement on December 7, 2023, with the property subsequently rising by 14.87%.
This article unveils my latest assessments incorporating the Q1 2024 income data released on March 7 of the current year. Following a thorough valuation process, I determined Broadcom’s fair price to be \(2,006.62, reflecting a 53.3% upside from the current stock price of \)1,308.72. Looking ahead to 2029, a projected future price of $3,676.77 suggests annual returns of 30.2% throughout the year. A comparison with industry standards revealed lower EPS projections, underscoring Broadcom’s potential. Additionally, exploring scenarios where networking operations grow at a slower rate indicated fair valuation, positioning Broadcom as an attractive risk-reward opportunity, prompting an upgrade from a solid buy to a strong buy rating.
Seeking Alpha
Overview
Progress Plans
Broadcom’s strategic focus on large corporations involves offering complementary solutions tied to its core offerings. The company’s reputation for cost-effective acquisitions aimed at building a leading business software entity sets it apart in the industry.
How does Broadcom stack up against Peers?
Broadcom’s evolution through various mergers has shaped its unique position in the market, particularly in social, mobile, and bandwidth segments. Despite its diversified application division accounting for 5% of income, Broadcom maintains a significant presence in the business networking sector with a 14.54% market share. Key competitors like Cisco Systems, Inc. (CSCO) and Dell Technologies Inc. (DELL) collectively dominate a substantial portion of the market.
Market share calculations were based on respective networking revenues relative to the total market size of $61.2 billion in 2023.
Author’s Estimates
In the global network equipment market valued at $174.81 billion in 2023, Broadcom holds a market share of approximately 4.71%. Leading players like Huawei and Cisco command significant shares, with Broadcom ranking among the top five due to its wireless network equipment contributions. The market’s future dynamics are heavily influenced by Huawei and Cisco’s dominance.
Author’s Estimates
Broadcom’s presence in the broadband technology industry is notable, boasting a market share of around 14.97%. While specific market share data for other players remains undisclosed, Broadcom’s strong position underscores its competitive edge. Projections indicate a positive growth trajectory for the industry, aligning with Broadcom’s market share.
Market Thinking
The global network gear market, anticipated to grow at a CAGR of 9.20% through 2032, presents significant opportunities for Broadcom. With a market size reaching \(32.65 billion by the end of 2023, the industry is poised for substantial expansion, with a projected valuation of \)50.6 billion by 2028.
Author’s Estimates Based on Allied Market Research
Broadcom’s comprehensive offerings in the information center business encompass networking, storage, and machines, supported by essential software components facilitating seamless server operations. The evolving landscape includes distributed applications and networking solutions catering to diverse client needs, with a projected market revenue of $438.63 billion by 2028, reflecting a 6.56% CAGR.
Statista
The wireless infrastructure sector, crucial for delivering wireless signals to smartphones, is forecasted to reach $271.8 billion by 2028, showcasing robust annual growth potential of 11%.
Precedence Research
Cybersecurity emerges as a burgeoning sector, with the global market revenue expected to reach $273.50 billion by 2028, translating to an annual CAGR of 10.48%.
Statista
Storage Area Network (SAN) solutions, facilitating efficient data storage and accessibility, are integral to Broadcom’s offerings. The SAN market is projected to exhibit a notable CAGR of 24.7% through 2028, reaching a valuation of $56.2 billion.
Author’s Calculation based on Statsmarketresearch
Payment security, a critical domain for safeguarding financial transactions, is poised for substantial growth, with a projected CAGR of 15.44% through 2028, culminating in a valuation of $48.14 billion.
Author’s Estimates Based on Mordor Intelligence
Broadcom’s market reach spans various sectors, contributing to an estimated overall addressable market of \(1.13 trillion by 2028, reflecting an 8.60% annual growth from 2023’s \)745.08 billion.
Headwinds
Broadcom’s revenue surpassed EPS estimates in Q1 2024, accompanied by a $50 billion revenue forecast marginally below consensus estimates. Despite these positive indicators, the stock experienced a decline post-earnings, signaling potential market dynamics. Notably, on a trailing twelve-month basis, revenue increased by 8.37%, while operating and net income witnessed declines of 6.49% and 17% respectively. These shifts impacted margins, with operating income and net income margins experiencing reductions from Q4 2023 figures.
Author’s Estimates
Author’s Estimates
The balance sheet reflected a significant uptick in long-term debt, reaching \(73.4 billion, juxtaposed with a decrease in cash reserves by \)2.3 billion. The surge in debt led to a 32% increase in interest payments, highlighting financial implications.
Author’s Estimates
Despite the rise in debt and declines in operating & net income, free cash flow exhibited growth of 7.12%, reaching $19.51 billion. However, a slight decline in the FCF margin was noted, positioning it at 50.2% compared to 2023 figures.
Author’s Estimates
Valuation
A detailed DCF analysis was conducted for Broadcom, factoring in current financial data to derive the Weighted Average Cost of Capital (WACC) at 11.63%. The analysis considered key financial metrics to project future performance, with a focus on revenue projections, cost dynamics, and interest rate fluctuations. The resulting fair price assessment indicated a substantial upside potential, with a fair price of \(2,006.62 representing a 53.3% increase from the current stock price. Looking ahead to 2029, a projected future price of \)3,676.77 suggests robust annual returns of 30.2% throughout the year.
How do the estimates I make compare to the average consensus?
Comparative analysis revealed that my estimates diverged significantly from the average consensus projections. Notably, my EPS estimate for 2024 stood at \(27.80, marking a 41.21% variance from the average consensus of \)46.95. These variations stemmed from nuanced revenue forecasts and net income margin assumptions, underscoring the unique perspective offered by my analysis. Despite projecting lower figures, my outlook remains optimistic, projecting a 7.24% net income growth for 2024.
Author’s Estimates
Risks to Thesis
Broadcom’s strategic approach involving M&As and cost optimization strategies presents inherent risks, particularly concerning long-term debt management. While potential debt escalation poses challenges, a favorable interest rate environment could mitigate associated risks. Additionally, the company’s heavy reliance on AI-related ventures introduces market sensitivity risks, with a hypothetical scenario indicating fair valuation if networking growth deviates from projections. Despite these risks, Broadcom’s overall risk-reward profile remains favorable, reinforcing its position as a compelling investment opportunity.
Outlook
Anticipating robust net sales growth for Broadcom, with projections indicating \(41.68 billion for 2024 and \)49.14 billion for 2025. Noteworthy revenue and net income margins underscore the company’s growth trajectory, subject to evolving market dynamics and operational efficiencies.
Conclusion
Broadcom’s strong financial performance, coupled with a history of successful M&As and cost optimization initiatives, positions it as a promising investment prospect. Leveraging a DCF model, the fair price per share assessment underscores substantial upside potential, with a projected 2029 price of $3,676.77 reflecting compelling annual returns of 30.2%. Comparative analysis with consensus estimates highlights the unique insights provided by my projections, signaling a shift from a buy to a strong buy rating for Broadcom.
