Broadcom stock forecast ahead of earnings: is AVGO priced to perfection?

Broadcom stock price has been in a strong bull run this year as it became one of the top beneficiaries of the booming artificial intelligence (AI) industry. AVGO has soared by nearly 70% this year, bringing its market capitalization to over $1.84 trillion. This article explores whether it is a good stock to buy ahead of its earnings this week.

Broadcom stock is benefiting from the AI tailwinds 

The AVGO stock price has been in a strong uptrend this year as it emerged as one of the main beneficiaries of the AI industry.

The company reached a deal with OpenAI that will see it develop its custom chips as the latter expands its data centers beyond Nvidia. The deal positioned Broadcom as a crucial supplier alongside other companies like Nvidia and AMD, with analysts expecting its total value to be between $300 billion and $350 billion.

Broadcom also has a long relationship with Google, a company whose chips have helped to propel its market capitalization towards the $4 trillion level. 

Additionally, the company has a relationship with Apple, in which it sells advanced wireless components, especially 5G radio frequency parts.

All these relationships have helped boost Broadcom’s growth in the past few quarters. Its most recent results showed that the company’s revenue rose by 22% to $15 billion, continuing its trend of beating analysts’ estimates.

This growth was largely driven by its emerging AI business, which made over $5.2 billion in the third quarter. The management expects that its revenue will soar to $6.2 billion in the fourth quarter, a significant growth for a company that had a limited market share in the sector.

The next key catalyst for the AVGO stock price will be its earnings, which will come out on Thursday. Analysts expect the upcoming results to show that the company’s revenue rose by 24.2% in the fourth quarter to $17.46 billion, continuing a growth trajectory that has been going on for years.

If this is accurate, the company will bring its annual revenue to $63.42 billion, up by 23% from the same period last year. 

Most importantly, analysts expect that its revenue growth will accelerate in the next financial year, rising by 35.7% to over $86 billion. This is a remarkable growth metric for a company that has been around for decades.

Broadcom’s profitability is also expected to keep growing in the coming years. This average estimate is that its earnings per share (EPS) will come in at $1.87, up from $1.42x bringing its annual profit per share to $6.75. Its EPS will then surge to $9.33. Historically, Broadcom has a long track record of doing much better than estimates.

Valuation and potential risks remain 

The ongoing Broadcom stock price surge has some potential risks. One of the main risks is that it has a big relationship with OpenAI, A company that is not yet profitable. In a recent note, analysts at HSBC warned that the company will not make a profit by 2030 and that it will need to raise at least $207 billion to fund its commitment.

OpenAI also received a $100 billion commitment from Nvidia, a move that will see it keep buying its chips. It is unclear whether the company will need its Broadcom-made chips after this relationship.

Most importantly, the company has become highly valued, with its forward price-to-earnings ratio of 91 being much higher than other companies like Nvidia. As such, there are signs that it is priced to perfection, which is a major risk ahead of its earnings.

AVGO stock price technical analysis 

The daily timeframe chart shows that the Broadcom stock price has remained in a tight range as investors waited for the upcoming results. It has remained slightly above the 50-day and 100-day Exponential Moving Averages (EMA).

The stock is slightly below the upper side of the ascending channel shown in black. Also, it has started forming a bearish divergence pattern as the MACD and the Relative Strength Index (RSI) have moved downwards.

Therefore, the most likely scenario is where the stock pulls back ahead of earnings, potentially to $350. It will then rebound and possibly move above the upper side of the channel after publishing its numbers later this week.

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