Broadcom Inc. (AVGO) Valuation Report

Intrinsic Value
$187B

Value Per Share
$437 -66%

Price Target
$491 -62%

Market Cap
$601B

Enterprise Value
$626B

Price
$1,296.69 0.04%

Dividend Yield
1.6%

Adjusted Yield
2.2%

TTM Growth Margin Ratio Yield
Revenue $36B 7.9% 17.5x
Gross $25B 11.7% 68.9% 25.4x
EBITDA $21B 8.3% 58.1% 30.1x
EBIT $16B 13.9% 45.2% 38.6x 2.6%
Profit $14B 22.5% 39.3% 42.7x 2.3%
FCFF $15B 2.0% 41.1% 42.6x 2.3%
FCFE $15B 11.0% 45.7% 38.8x 2.6%
Cost of Equity = 9.7% | Cost of Capital = 9.4%Currency: USD | Updated:
Sector: Technology | Industry: Semiconductors | Read more...

Broadcom Inc.
designs, develops, and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide.
The company operates in two segments, Semiconductor Solutions and Infrastructure Software.
It provides set-top box system-on-chips (SoCs); cable, digital subscriber line, and passive optical networking central office/consumer premise equipment SoCs; wireless local area network access point SoCs; Ethernet switching and routing merchant silicon products; embedded processors and controllers; serializer/deserializer application specific integrated circuits; optical and copper, and physical layers; and fiber optic transmitter and receiver components.
The company also offers RF front end modules, filters, and power amplifiers; Wi-Fi, Bluetooth, and global positioning system/global navigation satellite system SoCs; custom touch controllers; serial attached small computer system interface, and redundant array of independent disks controllers and adapters; peripheral component interconnect express switches; fiber channel host bus adapters; read channel based SoCs; custom flash controllers; preamplifiers; and optocouplers, industrial fiber optics, and motion control encoders and subsystems.
Its products are used in various applications, including enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays.
Broadcom Inc.
was incorporated in 2018 and is headquartered in San Jose, California..

Full-time employees: 20,000 | HQ: San Jose
Website: https://www.broadcom.com

Valuation

Input

➜ Revenue Growth

➜ EBIT Margins

➜ Reinvstment Efficiency

➜ Cost of Capital

➜ Tax

AVGO Valuation Output

Terminal value

$270B

+ PV Terminal Value

$113B

+ PV FCFF

$99B

= Sum of PV

$212B

+ Cash

$14B

- Debt

$39B

= Intrinsic Value

$187B

Value Per Share

$437

Overvalued by 66% vs its $1.3K Price

1-Year Price Target

$491 (-62%)

10-Year Fundamental Projections for Broadcom Inc. (AVGO)
YearGrowthSalesEBIT %EBITTaxNOPATReinvestmentROICFCFFWACCPV FCFF
TTM 6.9% $36B 45.2% $16B 6% $15B -$1.7B 31% $15B 9.4% --
2025 6.9% $38B 45.2% $17B 6% $16B $3.5B 31% $13B 9.4% $12B
2026 6.9% $41B 45.2% $19B 6% $17B $3.8B 31% $14B 9.4% $11B
2027 6.9% $44B 45.2% $20B 6% $19B $4B 31% $15B 9.4% $11B
2028 6.9% $47B 45.2% $21B 6% $20B $4.3B 31% $16B 9.4% $11B
2029 6.9% $50B 45.2% $23B 6% $21B $4.6B 31% $17B 9.4% $11B
2030 6.4% $53B 45.2% $24B 9% $22B $5.3B 29% $17B 9.2% $9.7B
2031 5.9% $56B 45.2% $25B 12% $22B $5.2B 28% $17B 9.0% $9.2B
2032 5.3% $59B 45.2% $27B 16% $23B $5B 27% $18B 8.9% $8.7B
2033 4.8% $62B 45.2% $28B 19% $23B $4.7B 26% $18B 8.7% $8.2B
2034 4.3% $65B 45.2% $29B 22% $23B $4.4B 24% $18B 8.5% $7.7B
♾️ 4.3% $68B 45.2% $31B 25% $23B $12B 8.5% $11B 8.5% --
How is AVGO's expected return calculated?

The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate AVGO's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.

Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of Capital - Dividend Yield))
12.3% = 109.4% * (9.4% * 120.3%)

We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.

Growth

In the 12 months ending Q4'23 Broadcom Inc. (AVGO) grew revenues by 7.9%, from $33B to $36B - indicating a deceleration of revenue growth. AVGO has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 9.7% and 9.3% respectively.

Revenue Growth Estimates

Sustainable
-2.4%
Fundamental
-6.5%
Priced-in
9.3%

Bottom Line Growth Estimates

Fundamental Earnings Growth
-0.1%
Fundamental EBIT Growth
-4.8%
Priced-in FCFF Growth
6.9%

Looking at forward estimates, we can see that the market is pricing-in a 9.3% long-term revenue growth rate, while the financials indicate a future revenue growth rate between -2.4% and -6.5%.

Using the average of these 3 estimates we get a 0.1% long-term revenue growth for AVGO.

What is AVGO's sustainable revenue growth?

Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.

(AVGO) has invested $49B in total capital, consisting of $24B in book value of equity, plus $39B in total debt, less $14B in cash & equivalents.
By adding on the average reinvestment of -$2.4B in the last 4 quarters on a TTM basis to the $49B capital base, and applying the current sales to capital ratio of 73.1%, we can expect the company to grow its revenue to $34B, implying growth of -4.8%. However, we assume at least one gap year for CapEx to transform into growth, so we divide the rate by 2 and get a -2.4% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment to yield growth.

What are AVGO's fundamental revenue & EBIT growth rates?

The fundamental growth rates analyze how much (AVGO) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.

Broadcom Inc. (AVGO) has reinvested an average of -$2.4B on a rolling TTM basis, reflecting a reinvestment rate of -15.4%, calculated as:
Reinvestment / (EBIT - Tax) a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term estimate for a growth in EBIT:
-15.4% * 31.0% = -4.8% (Reinvestment rate * ROIC)

In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 136.0%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of -6.5%.

What FCFF & revenue growth rates is the market pricing-in for AVGO?

In order to justify the current $601B market capitalization given a 9.4% cost of capital, AVGO needs to keep growing its un-levered free cash flows by 6.9% across many ( >10 ) years.

AVGO's market implied FCFF growth rate of 6.9% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($626B * 9.4% - $15B) / ($626B + $15B)

By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 136.0% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 9.3%

Margins

Gross
68.9%
3.6% YoY
EBIT
45.2%
5.6% YoY
Profit
39.3%
13.6% YoY
FCFF
41.1%
-5.5% YoY
Why is AVGO scaling revenues by 7.7% relative to COGS?

AVGO grew revenue by 7.9% in the last 12 months, and their COGS changed by 0.2% in the same period. This means that the company is scaling revenues 7.7% better than costs.

A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.

Free Cash Flows

Reinvestment
$1.7B
FCFF
$15B
FCFE
$15B
Net CapEx
$3.3B
Simple FCFF
$18B
Change in WC
-$1.6B

Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.

What is included in AVGO's $505M capital expenditures?

In the last 12 months AVGO invested $452M in plant property & equipment (PPE) CapEx. By adding the $53M in acquisition expenses, we get a total CapEx of $505M.

How much is AVGO reinvesting into the business?

In the last 12 months ending Q4'23, AVGO made capital expenditures of $505M. By netting out the depreciation of $3.8B, we get a NetCapEx of -$3.3B, indicating that the company invested less than it needs to, in order to sustain growth.

Finally, we add on the change in Working Capital of $1.6B, and get a Total Reinvestment of -$1.7B.

By depreciating more than it invests, AVGO is divesting assets from the business. This could lead to increased efficiency (free cash flows), but may also result in reduced growth.

How are AVGO's $15B free cash flows to the firm (FCFF) calculated? AVGO's $14,708,000,000.00 Free Cash Flows to the Firm (FCFF) =
$16,207,000,000.00 EBIT
- $924,000,000.00 Tax
- $452,000,000.00 Plant Property Equipment
- $53,000,000.00 Acquisitions
+ $3,835,000,000.00 Depreciation
+ -$1,643,000,000.00 Change in Working Capital
- $2,171,000,000.00 Stock Based Compensation

Free Cash Flows to the Firm are important because they indicate how much a company has left over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified version of free cash flows (Cash from operating activities - PPE).

In the last 12 months AVGO had $15B in free cash flows, indicating that the business has managed to create value for investors.

How are AVGO's $15B free cash flows to equity investors (FCFE) calculated? AVGO's $15,483,000,000.00 Free Cash Flows to the Equity (FCFE) =
$14,082,000,000.00 Net Income
- $452,000,000.00 Plant Property Equipment
- $53,000,000.00 Acquisitions
+ $3,835,000,000.00 Depreciation
+ -$1,643,000,000.00 Change in Working Capital
+ $39,229,000,000.00 Total Debt today
- $39,515,000,000.00 Total Debt one year ago

Free Cash Flows to the Equity investors show how much the company has left over for shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt, as it can reveal the effect of interest rates on the value of equity.

When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months AVGO had $15B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.

Returns

ROE
58.7%
ROIC
31.0%
Sales to Cap
73.1%
How much excess returns (value) is AVGO creating on average (35%), and how to calculate it?

ROE Excess Returns 49.1% = Return on Equity - Cost of Equity
ROC Excess Returns 21.6% = Return on Capital - Cost of Capital

Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2

For every 1% of growth in its net and operating income, the value of AVGO's stock changes by an average of 0.35%.

Excess returns are important because they help us estimate a company's target price.

If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.

Capital Structure

Equity
$24B
Debt
$39B
Cash
$14B
Interest Coverage
10.0x
Debt to EBITDA
1.89x
Debt to Capital
6.1%

Dividends & Buybacks

Adj. Yield
2.2%
Dividends + Buybacks - SBC
FCFE Payout
85.0%
% FCFE paid as Div + Net Buybacks
R-R Upside
-59.2%
FCFE yld. / Cost of Equity - 1

Broadcom Inc. has transferred a total value of $13B to investors in the last 12 months. The required cash return (excluding expected growth) for AVGO is $32B, or a 5.4% yield in the same period.

With an adjusted payout of 85.0%, AVGO seems to be spending an affordable portion of its FCFE.

SEC Filings

Examine the details and validate data:

Historical SEC Filings

Headlines