Does The Hype Around Broadcom Inc.’s (NASDAQ:AVGO) Growth Justify Its April Share Price?

Broadcom Inc. (NASDAQ:AVGO) is a stock well-positioned for future growth, but many investors are wondering whether its last closing price of $318.62 is based on unrealistic expectations. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for Broadcom

Can we expect AVGO to keep growing?

Broadcom is poised for extremely high earnings growth in the near future. Expectations from 30 analysts are extremely positive with earnings forecasted to rise significantly from today’s level of $15.668 to $17.136 over the next three years. This results in an annual growth rate of 30%, on average, which signals a market-beating outlook in the upcoming years.

Is AVGO available at a good price after accounting for its growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Broadcom is trading at price-to-earnings (PE) ratio of 20.34x, which tells us the stock is overvalued based on current earnings compared to the Semiconductor industry average of 20.24x , and overvalued compared to the US market average ratio of 18.17x .

NasdaqGS:AVGO Price Estimation Relative to Market, April 20th 2019
NasdaqGS:AVGO Price Estimation Relative to Market, April 20th 2019

We understand AVGO seems to be overvalued based on its current earnings, compared to its industry peers. But, to be able to properly assess the value of a high-growth stock such as Broadcom, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 20.34x and expected year-on-year earnings growth of 30% give Broadcom a very low PEG ratio of 0.68x. So, when we include the growth factor in our analysis, Broadcom appears relatively cheap , based on its fundamentals.

What this means for you:

AVGO’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are AVGO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has AVGO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AVGO’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.