Broadcom (AVGO -1.47%) may have caught many of its bulls by surprise amid its recent surge of 25% after a 40% increase and a significant pullback. The company's booming AI chip business supercharged a stock that has prospered by building specialty semiconductors.
Additionally, acquisitions have proved fortuitous for Broadcom at large, and for AI-related product offerings that leverage both hardware and software capabilities. Its strength in AI helped Broadcom's market cap cross the $1 trillion threshold amid this recent surge, making it the eighth most valuable company currently trading on U.S. exchanges.
Still, a 25% gain over a short period is uncommon for even the highest-quality stocks, and the fact that it has pulled back after that run could indicate a loss of interest in the stock. Now, the question for investors is whether those moves mean investors should take profits in Broadcom, or stay with the semiconductor stock.
The recent stock surge
Indeed, one might struggle to find a time when Broadcom stock performed better than it has in the last month. The stock surged 24% higher in the trading session following the company's Dec. 12 earnings report. In the fourth quarter of fiscal 2024 (ended Nov. 3), revenue of $14 billion increased 51%, as AI revenue rose by 220%.
Additionally, the stock rose 11% higher in the following trading session. A Bank of America analyst upgraded Broadcom on the belief that AI will drive considerable growth into the first half of 2025, and that the chip stock will be one of the primary beneficiaries of that boom.
Although the stock pulled back in subsequent trading sessions, that is not necessarily an indication that the bull market has ended. Nonetheless, the volatility makes the stock's behavior hard to predict in the near term.
Financials and valuation
The financials show that the aforementioned 51% revenue growth in fiscal Q4 was not a one-time event. For fiscal 2024, Broadcom's revenue of $52 billion rose 44% compared to fiscal 2023.
However, investors have to remember that AI prompted Broadcom to increase research and development spending by 77%. Financing the purchase of VMWare also led to a temporary increase in operating expenses. Consequently, net income for fiscal 2024 came in at $5.9 billion, well under the $14 billion profit in fiscal 2023.
Its trailing price-to-earnings (P/E) ratio of around 184, caused by the previously mentioned rise in operating expenses, may seem high. That likely means its forward P/E ratio of 36 is more representative of its valuation. Additionally, the price-to-sales (P/S) ratio of 21 arguably makes Broadcom an expensive stock, even though other AI stocks such as Nvidia also maintain high valuations.
Unfortunately, one challenge that could undermine Broadcom is the implication that its current growth rate is not sustainable. Analysts predict revenue growth of 19% in fiscal 2025, far below the 44% in the most recent fiscal year. Such a slowdown could cause investors to question the company's future direction and sell the stock.
Is it time to sell Broadcom stock?
Despite near-term uncertainty, investors should probably stay with Broadcom stock.
Admittedly, its massive post-earnings surge and $1 trillion market cap may mean the stock is done rising in the near term. With that gain, investors may want to temporarily stop buying shares.
Nonetheless, investors increasingly see Broadcom as a critical AI stock in the chip space. Even if the stock price has temporarily moved ahead of fundamentals, its position in the AI industry should sustain the company for some time to come. Thus, investors should hold Broadcom stock, and consider adding shares if the stock goes into bear market territory.
