Broadcom: Solid Earnings – Buy The Dip (NASDAQ:AVGO)

I wrote about Broadcom Inc. (NASDAQ:AVGO) stock before earnings. Broadcom reported better-than-expected results but failed to provide the guidance it wanted. This sell-the-news dynamic has become a familiar theme this past earnings season. NVIDIA Corporation (NVDA) and other market-leading stocks fell after earnings, many after delivering better-than-expected earnings and strong guidance, such as Broadcom.

While we may see a mild, transitory slowdown in the enterprise AI market, now is probably not the time to give up on Broadcom stock. Instead, the recent slowdown offers mid- to long-term buying opportunities for Broadcom investors looking to capitalize on the growth likely to materialize in the enterprise AI space in the coming years.

Also, Broadcom stock is relatively cheap right now. It’s trading at around 22 times forward EPS estimates, which seems cheap for a company in its advantageous market-leading position. Moreover, Broadcom could is experiencing higher-than-anticipated EPS growth and there is a high probability that it will exceed future estimates despite the temporary growth slowdown. Due to the constructive setup and bullish momentum, Broadcom stock could appreciate considerably in the coming years.

Technical point of view – The picture remains optimistic

Broadcom stock hit a short-term top a few months ago. Since then, Broadcom has been in retreat/consolidation mode. Broadcom’s correction was about 30% from peak to trough, and the stock is still about 25% below its all-time high. We’ve also seen two successful tests of the 200-day MA support, and technical indicators like the full stochastic, RSI, CCI, and others suggest that momentum could soon improve in Broadcom stock. Technically, there is nothing to prevent it from breaking to new ATHs in the next upswing, which could start any time now.

Broadcom Earnings – So Why the Decline?

Broadcom reported EPS of $1.24 and revenue of $13.07 billion in its most recent quarterly announcement. EPS was three cents and sales topped $110 million. One problem here is that the market has become so optimistic about AI that it wants stronger beats and, perhaps more importantly, wants to see more solid guidance.

For Q4 (fiscal 2024), Broadcom provided $14 billion in sales guidance, slightly less than the $14.04 billion expected by the market. Still, there’s very little shortfall here, and Broadcom is likely to beat its guidance and should easily top $14 billion when it reports its fiscal fourth quarter later this year. Also, Broadcom’s growth could pick up, and it has a considerably long growth track, so Broadcom stock could move much higher.

Broadcom’s outperformance is likely to continue

Broadcom has missed EPS and sales estimates only once in the last 20 quarters (5 years). Broadcom’s TTM consensus EPS estimate was $4.43, but Broadcom reported $4.55, a modest 3% outperform rate. Therefore, we could see a similar rate of outperformance of 3-5% in the future. Also, Broadcom is likely to experience big earnings growth soon.

The fiscal 2025 consensus estimate is $6.17 in EPS. Applying a modest 3-5% performance rate allows for likely EPS of around $6.36-$6.48 (average estimate of $6.42) next year. Broadcom currently trades around $140, illustrating a potential sub-22 forward P/E ratio for its stock.

This P/E ratio is relatively cheap given Broadcom’s excellent sales and earnings growth potential and long growth trajectory. Therefore, we could see substantial earnings growth and multiple expansion in the coming years. Given that Broadcom’s P/E ratio could expand into the 27-30 range, its stock could rise to around $173 – $193 over the next year (about 23% – 38% upside potential).

Wall Street remains bullish on Broadcom

Despite recent volatility, Wall Street remains bullish on Broadcom. I should also point out that while Broadcom shares have corrected 25% to 30%, price targets have not declined, illustrating the high level of conviction behind its stock and its significant earnings power .

Notably, the average price target for Broadcom is around $193, almost 40% above the current stock price. Also, the lowest price targets are around $155, about 11% higher than Broadcom’s current lows. Finally, the bullish, high-end case scenario price targets go as high as $240, representing the potential for a roughly 70% gain over the next year.

Where Broadcom Stock Could Be in the Future:

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Source: The Financial Prophet

Broadcom’s guidance of $14 billion versus the estimate of $14.04 does not affect my medium to long term projections for Broadcom. Despite the weak growth environment, growth should improve in the coming quarters, likely improving profitability and driving higher valuations. A forward P/E ratio of 20-22 may be too low for Broadcom, as it has substantial EPS and sales growth potential and momentum, and its multiple could expand to 25-30 or more over the next years. Therefore, Broadcom stock has a high probability of appreciation and could be one of the best long-term buy-and-hold candidates right now.

Risks to Broadcom

Broadcom faces risks from competition looking to tap into the lucrative enterprise AI space. There is also the risk that a slower-than-anticipated economy could hurt demand. The higher interest rate for longer dynamics may also be harmful for Broadcom as companies may be nervous to invest or wait for more affordable monetary periods. Expectations remain incredibly high, and the company needs to perform optimally to continue beating estimates. The slightest of disappointments could cause his stock to drop considerably. Investors should consider these and other risks before investing in Broadcom.