Subdued Growth No Barrier To Broadcom Inc. (NASDAQ:AVGO) With Shares Advancing 39%

Those holding Broadcom Inc. (NASDAQ:AVGO) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 59%.

Following the firm bounce in price, you could be forgiven for thinking Broadcom is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 17.6x, considering almost half the companies in the United States' Semiconductor industry have P/S ratios below 3.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out 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. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Broadcom.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Broadcom would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 41% last year. The strong recent performance means it was also able to grow revenue by 91% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 23% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Broadcom's P/S is outpacing its industry peers. 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.

The Bottom Line On Broadcom's P/S

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. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Broadcom that we have uncovered.

If you're unsure about the strength of Broadcom's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.