Broadcom has been treading water for the past six months, recording a small return of 1.6% while holding steady at $178.72. However, the stock is beating the S&P 500’s 6.9% decline during that period.
Is there still a buying opportunity in AVGO, or does the price properly account for its business quality and fundamentals? Find out in our full research report, it’s free.
Why Is Broadcom 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
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Broadcom’s 19.2% annualized revenue growth over the last five years was exceptional. Its growth beat 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
Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.
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 75.4% gross margin over the last two years. That means Broadcom only paid its suppliers $24.58 for every $100 in revenue. 
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 41.9% over the last two years.
Final Judgment
These are just a few reasons why we think Broadcom is a high-quality business, and after its recent outperformance in a weaker market environment, the stock trades at 26.8× forward price-to-earnings (or $178.72 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More Than Broadcom
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