1 headline number from this artificial intelligence (AI) giant’s latest report could mislead investors

When analyzing the health of a public company, you often can’t just rely on headline numbers. Frequently, the story is more than just revenue growth or profit margins — there’s a story behind every metric.

A case in point, consider Broadcomhis (AVGO 1.90%) last report. The company certainly wasn’t trying to mislead, but the headline number it’s trumpeting — that its revenue rose 47% year-over-year to $13.1 billion — doesn’t tell the whole story of what it happens.

Broadcom’s former core business isn’t doing great

Broadcom has become a giant player in technology, doing a lot of things. It is best known for designing chips, but also offers software for computing infrastructure, virtual desktops and cybersecurity. In addition, it makes connectivity switches that are critical to data center functionality.

In that light, one could look at last quarter’s 47% revenue growth figure and assume that Broadcom’s underlying operations were excellent. They weren’t. In November, Broadcom completed its $69 billion acquisition of VMware, which focused on cloud computing and virtual desktops. As a result, Broadcom’s financial statements now include the sale of a huge business it didn’t own last year, altering its growth numbers.

When you factor in VMware’s contribution to the top line, Broadcom’s revenue grew just 4% year-over-year. That’s a poor performance, especially given the tailwinds blowing for its semiconductor business.

Given the massive demand for its connectivity switches and custom chip designs (Broadcom has helped cloud computing giants such as Alphabet designs custom chips for training artificial intelligence), investors were disappointed by its third-quarter fiscal results. After the company delivered the report on September 5, the stock fell 10%. Clearly, the market was not distracted by the headline figure and responded accordingly.

Clearly, the recent performance of this AI-connected company has not been what investors were hoping for. But is there hope for a comeback on the horizon?

Next year should be better for Broadcom

During the earnings conference call, analysts asked management what they expected in terms of AI segment growth, especially since it was flat year-over-year in fiscal Q3. For that period, which ended Aug. 4, AI’s revenue was about $3.1 billion, but management expects that to rise to $3.5 billion in Q4. In addition, Broadcom expects strong AI growth in fiscal 2025, although it did not provide specific guidance for that period.

In fiscal 2025, Broadcom’s numbers will again be comparable to the prior year’s numbers on an apples-to-apples basis — both years’ numbers will include the inorganic growth the company accrued from the VMWare acquisition. The consensus forecast of analysts covering Broadcom is for its revenue to grow 17% in fiscal 2025, so I agree with management that it should be a better year.

But is that enough to make the stock a buy?

AVGO PE Ratio data (before) by YCharts.

Recently, Broadcom was trading at 29 times forward earnings. That’s a higher valuation than some of its chipmaking peers — Taiwan Semiconductor Manufacturingfor example, it was trading at 25 times forward earnings.

Despite Broadcom’s recent share price decline and pedigree, its stock doesn’t exactly look like a strong value proposition or a great growth story. Thesis falls somewhere in the middle of the two, making it a difficult stock to buy. I think there are better options than Broadcom if you want to increase your exposure to the AI ​​trend.