Broadcom (NASDAQ: AVGO) kicked off 2024 with a strong start, enjoying a 26% rise in its stock until it provided investors with its outlook for the remainder of the year on Thursday. However, the market response was less favorable than anticipated, as Broadcom’s revenue forecast fell slightly short of estimates. Consequently, Broadcom stock experienced a 7% decline on Friday in response to the news.
Despite this setback, Bank of America analyst Vivek Arya remains optimistic about Broadcom’s prospects, considering the drop in stock price as a temporary phenomenon. Arya suggests that Broadcom stock has the potential to rebound strongly, projecting a target price of $1,680. For investors who purchased Broadcom at Friday’s closing price, BofA anticipates a potential return of approximately 28% within a year.
Is Broadcom stock a buy?
Given Broadcom’s current price of $1,320, the $1,680 target price set by Bank of America may seem like a lofty goal. While Broadcom’s fiscal Q1 2024 earnings report exceeded expectations, with quarterly sales of $12 billion and adjusted profits of $10.99 per share, concerns remain about its valuation. Trading at 56 times trailing earnings on a GAAP basis, Broadcom appears pricey, especially considering the modest growth outlook of around 14% per year over the next five years.
Bank of America analyst Vivek Arya is optimistic about Broadcom’s growth prospects, particularly in the short term. He expects Broadcom’s sales to surge by 40% year over year to $50 billion in 2024, with operating profit margins rebounding to 60% to 65% eventually. Arya foresees annual earnings averaging $70 to $75 per share. However, much of this growth is driven by Broadcom’s acquisition of VMware last year, raising concerns about the sustainability of organic growth, which was only 11%.
BofA’s target price of $1,680 and long-term earnings target imply a forward price-to-earnings ratio of 23 for Broadcom stock. This valuation appears reasonable if Broadcom can achieve robust 40% earnings growth but less so if it settles for 14% growth. Ultimately, the discrepancy between the target price and the expected growth rate underscores the uncertainty surrounding Broadcom’s future performance.
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