Broadcom Inc.'s (NASDAQ:AVGO) 29% Share Price Surge Not Quite Adding Up

Broadcom Inc. (NASDAQ:AVGO) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 109% in the last year.

Following the firm bounce in price, Broadcom may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 17.6x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios under 4.5x and even P/S lower than 1.7x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Broadcom

How Broadcom Has Been Performing

With revenue growth that's inferior to most other companies of late, Broadcom has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Broadcom will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Broadcom?

The only time you'd be truly comfortable seeing a P/S as steep as Broadcom's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 32%. Pleasingly, revenue has also lifted 77% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 16% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 25% per year growth forecast for the broader industry.

With this information, we find it concerning that Broadcom is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Broadcom's P/S Mean For Investors?

Broadcom's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see Broadcom trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Broadcom has 4 warning signs we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.