Broadcom stock: is it safe to buy the expensive AVGO shares?

Broadcom stock price has been in a relentless bull run this year as it surged to a record high. It moved to a high of $370, bringing the year-to-date gains to 60%. It has surged by almost 1,000% in the last five years.

This article explains why the AVGO stock price has surged this year, and whether it has more room to go in the coming months.

Why Broadcom stock price soared

Broadcom share price has been in a strong uptrend in the past few years as it continues to benefit from the artificial intelligence (AI) tailwinds.

The recent financial results showed that the company’s growth was continuing. It revenue jumped by 22% to $15.9 billion. Most importantly, the artificial intelligence solution rose by 63% to $5.2 billion.

The company expects that its AI revenue will continue seeing a double-digit growth trajectory in this quarter. Precisely, analysts expect that the division’s revenue will hit $6.2 billion in this quarter. 

The main catalyst for the AVGO going parabolic after its result last week was that it was selected by OpenAI to build its custom AI chips, in a deal valued at over $10 billion. 

This is a major shift that may position Broadcom as a major supplier of AI and other custom chips. OpenI hopes to ease its overdependence of semiconductors made by NVIDIA.

Most importantly for Broadcom, the shift towards custom chips could see it receive more orders from other companies like Microsoft, Google, and Amazon. 

Analysts see strong growth ahead

Wall Street analysts believe that the Broadcom stock price has more upside in the coming years. The average revenue estimate is that it will make $17.4 billion in revenues in the current quarter, up by 24% from the same period last year. 

They also expect that the earnings growth will accelerate, with the EPS growing by 33% to $1.87. Broadcom will then make $18.14 billion in the next quarter and $63 billion in the current financial year, a 22% annual growth. It will then jump to $83 billion in 2026. 

Chances are that Broadcom will deliver stronger results than expected as it has done in the past.

However, the main risk is that AVGO stock has become severely overvalued. It has a forward price-to-earnings ratio of 79, much higher than the sector median of 31. Its GAAP PE multiples are also bigger than Nvidia’s by far. 

The forward non-GAAP multiple is 50, also higher than the median estimate of 25. Most notably, the forward PEG ratio of 1.6 is bigger than other companies. 

These valuation metrics mean that, in normal times, AVGO share price would be ripe for a reversal. However, Broadcom has now become the ultimate momentum stock and has a catalyst with the OpenAI deal. It will also benefit from the upcoming Federal Reserve interest rate cut. 

AVGO stock price technical analysis 

The weekly chart shows that the Broadcom stock price has been in a strong bull run this year. It recently flipped the important resistance level at $251, the highest point in January. Doing that helped it to invalidate the double-top pattern that was forming. 

The Average Directional Index (ADX) has moved above 30, a sign that bulls are in control. Also, the Relative Strength Index (RSI) and the MACD continue rising. Therefore, the most likely scenario is where the stock continues rising as bulls target the psychological point at $400. 

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