Shareholders of Broadcom would probably like to forget the past six months even happened. The stock dropped 21.4% and now trades at $327.19. This might have investors contemplating their next move.
Following the drawdown, is now a good time to buy AVGO? Find out in our full research report, it’s free.
Why is AVGO a good business?
Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ: AVGO) is a semiconductor conglomerate spanning wireless communications, networking, and data storage as well as infrastructure software focused on mainframes and cybersecurity.
1. Skyrocketing revenue shows strong momentum
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Broadcom grew its sales at an incredible 27.4% compounded annual growth rate. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
2. Elite gross margin powers best-in-class business model
In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
Broadcom’s gross margin is one of the best in the semiconductor sector, and its differentiated products give it strong pricing power. As you can see below, it averaged an elite 76.2% gross margin over the last two years. That means Broadcom only paid its suppliers $23.81 for every $100 in revenue.
3. Excellent free cash flow margin boosts reinvestment potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Broadcom has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 43.2% over the last two years.
Final judgment
These are just a few reasons why we think Broadcom is one of the best semiconductor companies out there. After the recent drawdown, the stock trades at 19.8× forward P/E (or $327.19 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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