Don't Sweat This Semiconductor Stock Selloff

AVGO is up 26% year-to-date heading into earnings

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To quote Jay-Z, 'it was all good just a week ago.' Broadcom Inc. (NASDAQ:AVGO) soared to a record high of $577.21 on Nov. 19, with the last month's rally guided by the shares' ascending 10-day moving average. Now, a week later, the semiconductor stock is in focus for its recent pullback. With earnings looming on Dec. 9, should bulls be ready to pull the plug?

Broadcom stock is up 26% year-to-date. And despite the 2.6% pullback the last five trading days, AVGO's 20-day moving average is containing the damage. The only downside is the lack of contrarian pessimism that can be unwound; the majority of analysts rate Broadcom stock a "buy" or better and a slim 1.3% of AVGO's total available float is sold short.  

AVGO Chart

However, contrary to recent AVGO price action, Broadcom stock does not offer the greatest valuation or the most stable fundamentals, with a forward dividend of $14.40 with a dividend yield of 2.60%. AVGO currently trades at a rich price-earnings ratio of 41.14 and a sky-high price-sales ratio of 9.19. The semiconductor company also has $11.11 billion in cash and $40.46 billion in total debt on its balance sheet, which could hinder AVGO in the long run. In addition, Broadcom experienced an 88% decline in net income for fiscal 2019 and a 1.2% drop for fiscal 2020.

Nonetheless, Broadcom’s revenue growth has remained consistent in recent years, increasing 27% since fiscal 2018. AVGO's trailing 12-month net income has also increased a massive 117% since fiscal 2020. Furthermore, Broadcom stock’s forward price-earnings ratio of 18.66 offers a much better value for the $228 billion market cap company and indicates a big, expected increase in earnings. Overall, Broadcom stock continues to be a solid long-term option given its decent dividend yield, consistent revenues, and future bottom-line growth.

 

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