Broadcom (AVGO -1.19%) stock started 2024 on the right note, rising 26% until it told investors on Thursday how it expects to perform over the rest of 2024. Investors were disappointed that Broadcom predicted revenue slightly short of estimates, and Broadcom stock fell 7% on Friday.
But not to worry! Bank of America analyst Vivek Arya says this is just a temporary setback and Broadcom stock will climb to $1,680 If you bought Broadcom at Friday’s closing price, BofA thinks you can expect to earn roughly 28% within a year.
Is Broadcom stock a buy?
Is Broadcom stock, trading for $1,320 as I write this, really going to $1,680? I wouldn’t bet on it.
Granted, Broadcom’s fiscal Q1 2024 earnings report looked fine. Quarterly sales of $12 billion exceeded expectations. So did the $10.99 in adjusted profits the company earned. (Wall Street expected only $10.29). Valued on GAAP profit, though, Broadcom stock trades for 56 times trailing earnings, which seems pricey given most analysts don’t expect Broadcom’s earnings to grow much faster than 14% per year over the next five years.
Arya seems to think Broadcom can exceed that growth rate, and in the short term it might. With sales expected to rise 40% year over year to $50 billion in 2024, the analyst sees Broadcom’s operating profit margins recovering from about 39% (currently) to 60% to 65% (eventually), and says annual earnings should average about $70 to $75 per share. The problem is that most of Broadcom’s 2024 growth is inorganic, deriving from its VMware purchase last year — a jump in revenue that will be hard to replicate organically. Organic sales growth was only 11% despite the boom in AI demand seen elsewhere in the semiconductors industry.
BofA’s $1,680 target price and its $70-ish long-term earnings target imply a (very) forward P/E ratio of 23 on Broadcom stock — cheap if the company grows at 40%, but considerably less cheap if the best Broadcom can manage is 14% earnings growth.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Broadcom and HSBC Holdings. The Motley Fool has a disclosure policy.
