Broadcom Stock: Software Enables Diversification (NASDAQ: AVGO)

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Broadcom (NASDAQ: AVGO) is one of our favorite stocks in the semiconductor industry. AVGO operates a wide range of semiconductor and infrastructure software solutions businesses. Our bullish stance on the stock is due to the fact that we believe AVGO offers an attractive risk-reward ratio situation at current levels due to its diversified business in semiconductors. The company also has a diverse and growing software segment that provides a steady stream of earnings during semiconductor demand headwinds. We believe the company is well positioned to beat semiconductor market indices in the coming quarters.

The semiconductor market is facing demand headwinds that AVGO is not immune to. Still, we think the stock will still beat the competition and the indices. In 2Q22, AVGO’s revenue grew 23% to $8.1 billion and, in turn, exceeded consensus estimates by approximately 3%. We recommend investors invest in the tech giant, as we expect it to be among the few to weather the current market volatility and beat expectations.

Optimistic due to AVGO’s broad reach in the semiconductor market.

AVGO operates in the semiconductor and software segments, but its core business and stronghold is its semiconductor business. In 2Q22, semiconductor solutions accounted for 77% of revenue, with the remainder being software solutions. AVGO’s activities affect several markets within the semiconductor industry. The company’s role in semiconductors is that of a global supplier of products used in the enterprise and data center markets, home connectivity, broadband access, telecommunications equipment, smartphones , data center servers and storage systems, among others.

We believe the company’s wide range of semiconductor businesses positions it extremely well to beat competitors and indices that are more exposed and vulnerable to the unique markets of the semiconductor industry.

AVGO is focused on growth despite volatile demand.

Even though the company derives most of its revenue from the semiconductor segment, we believe AVGO is using its software segment to stabilize the company when headwinds arise in semiconductor demand. The company expanded its software offering by acquiring enterprise software companies. AVGO acquired the Symantec Enterprise Security business in 2019. A year earlier, AVGO acquired CA Technologies. The company is also working to complete the agreement to acquire VMware (VMW). VMW leads the industry with a stable revenue stream from its virtualization software business which includes server, storage and network virtualization and Virtual Desktop Infrastructure (VDI) technology.

AVGO beats competitors and semiconductor indices.

Although AVGO operates in a highly competitive industry, we expect the company to likely beat the competition and the semiconductor indexes because it has already done so. AVGO’s main competitors are Analog Devices (ADI), Advanced Micro Devices (AMD), Nvidia (NVDA), MaxLinear (MXL) and Marvell Technology (MRVL). The following graph shows the performance of AVGO shares over the past year compared to the competition. AVGO is the only company among its main competitors to have shown positive growth over the past year. Our bullish position on the stock is mainly due to the fact that the company is well positioned to weather market volatility. We expect the stock’s positive momentum to continue, as seen in the chart comparing AVGO to its competitors. The company is already launching new product lines and managing the risks of overordering. We believe the company is a buy as it will continue to beat the competition.

Broadcom outperformance

Y-Charts

AVGO not only beats the competition, it also beats the semiconductor benchmarks. The following graph compares AVGO to its semiconductor counterparts. At Techstockpros, we look for companies that are likely to outperform their peers. We look for companies that are likely to grow faster than the industry and can gain market share. We recommend AVGO as we believe the company should beat the semiconductor market over the next few quarters.

Broadcom performance against S&P and PHLX indices

Y-Charts

AVGO’s outperformance of semiconductor indices is nothing new. The following chart of the company’s 2021 10-K also shows a comparison of AVGO’s five-year cumulative total return against the S&P 500 Index and the NASDAQ 100 Index. We believe AVGO will continue to beat the semiconductor market and will recommend it as a purchase.

Broadcom Stock Performance vs. Nasdaq and S&P Indices

Broadcom 10-K

Stock market performance:

The performance of AVGO shares reflects a steady upward trend over the past five years. During this period, the stock rose about 94%. The stock is still well above the March 2020 pandemic low. AVGO stock peaked at $678 during its 52-week high and is currently trading at $491, closer to its low of $456 on 52 weeks. The stock has performed better than others in its peer group. YTD stock is down 30%. We believe the decline is not unique to AVGO but to the reality of the semiconductor peer group due to demand headwinds. We believe AVGO is well positioned to resume its upward trend as inflationary pressures ease and consumer spending picks up. We recommend buying the stock based on its upside potential and attractive valuation.

The following charts depict AVGO’s stock performance.

Broadcom Stock YTD Performance

Y-Charts

Five-year performance of Broadcom stock

Y-Charts

Evaluation:

AVGO is trading at around $491. We think the stock is reasonably valued with a P/E of 12.2x C2023 EPS of $40.37 versus a peer group average of 13.8x. The stock is trading at 6.3x C2023 on an EV/Sell basis against an average of 4.2x. We believe the stock is viewed as a growth pick and are bullish on the upside potential as the market stabilizes. The following chart illustrates the peer group valuation of semiconductors.

Valuation of semiconductors

Refinitiv

Word on Wall Street:

The Wall Street consensus on AVGO is a buy. 21 of the 25 analysts are rated buy, while the other four are rated hold. AVGO’s price targets further confirm analysts’ optimism for the stock with an average mid-price target of $678, giving room for a 38% upside. The following table shows AVGO sell odds and price targets:

Sell-side ratings and price targets

Refinitiv

What to do with inventory:

We believe AVGO offers a favorable risk-reward situation. We believe the company’s broad exposure to the semiconductor sector will likely maintain the company’s outperformance pattern. We also believe the company’s software segment offers revenue diversification alongside the broad exposure to semiconductors. We think the stock is a buy because we like the company’s prospects in semiconductors and its software franchises. While semiconductors are volatile, the software franchise provides a steady stream of profit even in times of volatile semiconductor demand.

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