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Even as interest rate anxiety starts to creep in, the artificial intelligence (AI) frenzy is still driving the market. With AI influencing almost every industry, investors can buy some excellent AI stocks right now. Among them is Broadcom (AVGO), a global technology company involved in semiconductor and infrastructure software solutions.
The company has a diverse product portfolio and a strong history of innovation. Broadcom's financial performance has been robust, with impressive results quarter after quarter. Its ability to meet increasing demand for semiconductors in a variety of industries, including networking, storage, broadband, and wireless communication, has been the driving factor behind its top-line growth.
This explains the stock's staggering returns of 2,041% over the last decade. Broadcom's stock price has continued to rise this year, as the company reported another strong quarter and an excellent start to fiscal 2024.
So far, AVGO stock has risen 22%, outperforming the tech-heavy Nasdaq Composite's ($NASX) 9.5% gain. Nonetheless, Wall Street sees more room for Broadcom to grow.
Another Strong Quarter for Broadcom
Broadcom's semiconductor business is its largest revenue generator, accounting for 62% of total revenue in the first quarter of fiscal 2024. The company does, however, have an infrastructure software segment that also contributes to its top line. Broadcom made numerous strategic acquisitions in 2020 to strengthen its infrastructure software segment.
The Semiconductor Solutions segment's revenue grew by a whopping 80% year on year to $7.4 billion. Meanwhile, infrastructure software revenue increased by 20% year on year, reaching $4.6 billion. Broadcom's total revenue increased to $11.9 billion from $8.9 billion in the same quarter last year. Diluted earnings rose by 6.4% to $10.99 per share.
To strengthen the infrastructure software segment, Broadcom paid $61 billion in cash and stock for cloud software company VMware last year. The company expects this acquisition to increase segment revenue by 49% over the next three years.
AVGO: A Dividend Stock
Broadcom is not only a hyper-growth stock, but it also pays dividends. It has a dividend yield of 1.6%, which is higher than the tech sector average of 1.37%. In the previous quarter, the company raised its quarterly dividend to $5.25 per share, a hike of 14%.
Broadcom's dividends have been steadily increasing for the past 14 years. Its forward payout ratio of 36.5% implies that the company's earnings can support current dividends, while also allowing for dividend increases.
Turning to the balance sheet, the company had $11.9 million in cash and cash equivalents at the end of the first quarter. It also generated $4.7 billion of free cash flow (FCF).
The company's strong positive FCF balance could help it continue to pay and increase dividends, pay down debt, and fund future AI investments. Management stated that the company has begun to reduce its debt, paying down $3 billion so far in 2024, and intends to reduce it further this fiscal year.
In fiscal 2024, the company expects to generate $50 billion in revenue, in line with analyst estimates. This guidance includes contributions from the VMware acquisition. Furthermore, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) for the fiscal year might meet 60% of projected revenue.
For fiscal 2024, analysts predict revenue and earnings to increase by 40% and 11.8%, respectively. Furthermore, revenue and earnings are expected to rise by 13.8% and 21.9%, respectively, in fiscal 2025.
Currently, AVGO is priced at 23 times forward 2025 earnings and 10 times forward sales. The stock seems reasonably valued compared to its competitors in the semiconductor industry.
What Does Wall Street Say About AVGO Stock?
On Wall Street, AVGO stock is a “strong buy” overall. Out of the 27 analysts that cover Broadcom stock, 24 rate it a “strong buy,” and three recommend a “hold.”
Based on AVGO’s mean target price of $1,485.05, the stock has a potential upside of 10% from current levels. Plus, its high price estimate of $1,720 indicates the stock could rise as high as 26.3% in the next 12 months.
The Bottom Line on AVGO Stock
Broadcom is well-positioned to capitalize on new opportunities while maintaining its position as a top provider of semiconductor and infrastructure software solutions. With a reasonable valuation, AVGO remains an appealing stock to buy right now, with the potential for long-term growth and value creation.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
