This Semiconductor Stock's Valuation May Be Deceiving

Broadcom stock looks like a promising long-term value play

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Semiconductor stock and and Apple (AAPL) supplier Broadcom Inc. (NASDAQ: AVGO) will release its fiscal first-quarter earnings results on Thursday, March 4, after the closing bell. Analysts have AVGO reporting an earnings per share (EPS) of $6.55 for the upcoming financial report.

Broadcom has a rather muted history of post-earnings reactions. It gapped higher by 7.1% last March, but shed 1% after its quarterly report in December. Overall, AVGO averages a post-earnings move of 4.4% in the last eight quarters, regardless of direction. This time around though, the options market is pricing in a larger-than-usual move of 7.1%.

Broadcom stock has seen some extraordinary growth over the past year. AVGO is up 60% in the last 12 months, carving out a channel of higher highs that culminated in a Feb. 19 record high of $495.14. And while the shares have taken a breather since then amid the broader tech selloff, their 50-day moving average has contained the damage.

AVGO Stock Chart

At first glance, Broadcom stock may seem overpriced because of its high price-earnings ratio of 72.24. However, the company’s forward price-earnings ratio of 18.76 is a much better indicator of its value.

At the start of the pandemic last year, Broadcom saw a slight decrease in revenues but has since resumed its rapid growth. In the company's latest quarter, the company increased revenues by more than $600 million. Additionally, they added over $5 billion in revenues to its top line since 2017, bringing its total annual revenue to $22.89 billion. Broadcom has seen similar growth on its bottom line, with its net income increasing by nearly $1 billion in the past three years. The chipmaker's total net income over the past year is now at $2.5 billion.

Overall, it is difficult to picture Broadcom stock not trading at a higher price 4-5 years from now. In the meantime, investors can take advantage of from the AVGO's 2.99% dividend yield. Long-term investors will want to keep tabs on AVGO if the market continues experiencing overall weakness.

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