Semiconductors giant Broadcom (AVGO 9.18%) stock jumped 10.7% through 10:20 a.m. ET Friday after reporting modest beats on both top and bottom lines in its fiscal Q3 earnings report last night.
Heading into the quarter, analysts forecast Broadcom would earn $1.66 per share (adjusted for one-time items) on sales of just over $15.8 billion. In fact, Broadcom earned $1.69 per share on sales of nearly $16 billion.
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Broadcom Q3 earnings
Not all the news was as good as the above makes it sound. "Adjusted" earnings may have been $1.69 per share, but actual earnings as calculated according to generally accepted accounting principles (GAAP) were barely half as good -- $0.85 per share. (They were a whole lot better than last year, however, when Broadcom lost $0.40 per share in Q3!)
Broadcom's revenue surged 22% year over year in Q3, with "custom AI accelerators" providing much of the growth; Q3 artificial intelligence revenue, says Broadcom, grew 63% year over year. And free cash flow for the quarter was a robust $7 billion, much stronger than reported net income ($4.1 billion), and up a strong 46.6% year over year.
Is Broadcom stock a buy?
How should one value Broadcom stock and decide whether it's a buy?
At its $1.6 trillion market capitalization, Broadcom stock costs a staggering 168 times earnings -- quite a high multiple even if Broadcom hits the 30% annualized earnings growth rate that Wall Street analysts project for it. The fact is, even valuing the stock on its more robust free cash flow, Broadcom sells for a 70x multiple, which looks rich even for 30% annualized growth.
All things considered, even after the fantastic quarter Broadcom just turned in, I cannot call this very expensive stock a buy.
