Should you buy Broadcom stock before September 5?

Broadcom (AVGO 3.75%) the stock has combined for impressive gains of 43% so far in 2024, easily outpacing the 22% gains posted by PHLX Semiconductor Sector index this year, and that’s not surprising since the semiconductor giant has delivered solid quarterly results of late thanks to growing demand for its custom chips.

Artificial intelligence (AI) plays a central role in driving Broadcom’s business. Specifically, Broadcom said in June that it was on track to generate more than $11 billion in revenue this year from sales of AI chips. However, a closer look at the company’s recent quarterly results shows that its AI revenue could reach stronger levels, which is why investors who haven’t bought this semiconductor stock should consider buying shares before releasing its earnings report on Thursday.

Broadcom stock could spark investor optimism on September 5

Broadcom will report its fiscal 2024 third-quarter results on Sept. 5 after markets close. Analysts expect $1.20 per share in earnings on revenue of $12.96 billion.

The revenue estimate suggests the company’s top line is on track to grow 46% year over year, driven in large part by the VMware acquisition it completed in November 2023.

However, investors should note that Broadcom has beaten Wall Street earnings expectations in each of the past four quarters. Additionally, the company raised its fiscal 2024 revenue estimate to $51 billion the last time it reported earnings, from a previous forecast of $50 billion, driven by stronger-than-expected demand for its AI chips .

Broadcom makes custom AI processors, known as application-specific ICs, that are apparently deployed by big tech names to train and deploy AI models. At the same time, the company’s networking business has also received an AI-driven boost, with demand for its ethernet switches growing rapidly to meet the growing demand for fast connectivity in data centers to support AI workloads .

More specifically, Broadcom AI’s revenue grew 280% year-over-year in the previous quarter. There’s a good chance the company can sustain that tremendous growth, both in the short and long term.

Harlan Sur of JPMorgan estimates that Broadcom’s cumulative revenue opportunity from AI over the next four to five years amounts to a massive $150 billion, which could help the semiconductor company’s revenue grow at an annual rate of 30% to 40% %.

Broadcom derives 58% of its revenue from the sale of semiconductor chips. That business generated revenue of $7.2 billion in fiscal Q2, translating to an annualized revenue rate of nearly $29 billion. With $3.1 billion in revenue from AI chip sales in the second quarter, 43% of Broadcom’s semiconductor sales were attributed to this fast-growing technology.

A $150 billion revenue opportunity indicates that Broadcom’s semiconductor revenue is likely to grow over the long term. As such, it won’t be surprising to see the company raise its full-year guidance again when it releases its results on September 5th, especially as it expands its customer base for custom AI processors and ramps up production for a third customer this year.

A set of better-than-expected results, along with another guidance boost, would likely give Broadcom stock a shot, which is why it might be a good idea to buy it ahead of future results given its valuation. It doesn’t make sense to try to time the market and buy just to take advantage of a short-term price increase, but I think the stock is worth holding for years.

The stock looks like an attractive bet based on this forward-looking valuation metric

Broadcom’s valuation multiples are expensive. The stock trades at 17 times sales and 72 times earnings. However, the forward earnings multiple of 27, based on earnings expectations, indicates a big jump in its bottom line. The company is expected to post earnings of $4.75 per share this year, which would be a small increase from last year’s level of $4.22 per share. But as the following chart shows, its underlying growth is expected to improve.

AVGO EPS estimates for current fiscal year data by YCharts

Broadcom’s expected acceleration in earnings growth explains why the stock has a price-to-earnings-growth ratio (PEG ratio) of 0.76.

AVGO PEG Ratio data (Before) by YCharts

The PEG ratio is a forward-looking valuation measure that is calculated by dividing a company’s earnings multiple by the estimated earnings growth it could produce. A reading of less than 1 is considered to mean that a stock is undervalued in light of the potential upside, and the chart above shows that Broadcom is an attractive stock to buy based on its potential upside.

As such, investors looking to add a growth stock to their portfolios would do well to buy Broadcom ahead of its upcoming results — as a strong set of numbers is likely to send the stock higher — and then hold onto long term.