Is Broadcom an Undervalued Growth Stock to Buy? | AVGO Stock Analysis

Summary

In this video, the creator performs a discounted cash flow (DCF) valuation to estimate the intrinsic value of Broadcom stock. Using key metrics like free cash flow estimates, market cap, debt, cash balance, and weighted average cost of capital (WACC), the creator calculates an intrinsic value of $175 per share. With a market price of $183, the stock appears fairly valued. The video emphasizes the importance of estimates and assumptions in valuation models, offering transparency and a margin of safety in decision-making for potential investors.

Takeaways

• 😀 The video provides an intrinsic value per share calculation for Broadcom stock using a Discounted Cash Flow (DCF) model.
• 😀 The current market capitalization of Broadcom is $859 billion, with 4.663 billion shares outstanding.
• 😀 Broadcom's long-term debt is estimated at $70 billion, while its cash and equivalents stand at $9.95 billion.
• 😀 Analyst estimates project Broadcom's free cash flow to grow from $21 billion in 2024 to $44 billion in 2028.
• 😀 For the period from 2029 to 2034, a 10% transition growth rate is applied to Broadcom’s free cash flow based on analyst projections.
• 😀 Starting in 2035, Broadcom’s free cash flow is forecast to grow at a long-term growth rate of 6%.
• 😀 The company’s weighted average cost of capital (WACC) is calculated at 11%, considering a 10% debt and 90% equity capital structure.
• 😀 The intrinsic value per share of Broadcom is estimated to be $175, compared to the current market price of $183.
• 😀 The $8 difference between intrinsic value and market price suggests that Broadcom is fairly valued, but within a margin of safety.
• 😀 The DCF model used discounts future cash flows to present value, as money in the future is worth less than money today.
• 😀 The speaker emphasizes transparency by explaining all the assumptions and estimates used to calculate the intrinsic value of Broadcom stock.

Q & A

What is the intrinsic value per share for Broadcom according to the DCF model?

The intrinsic value per share for Broadcom, based on the discounted cash flow (DCF) model, is approximately $175.

What key assumptions are made in the intrinsic value calculation for Broadcom?

Key assumptions include Broadcom’s free cash flow growth, with a 20% annual growth rate from 2024 to 2028, transitioning to 10% growth from 2029 to 2034, and a long-term growth rate of 6% starting in 2035.

What is Broadcom's market cap, and how does it factor into the intrinsic value calculation?

Broadcom's market cap is $859 billion, and it plays a crucial role in determining the company's overall value when adjusted for debt and cash in the intrinsic value calculation.

How is the terminal value for Broadcom calculated in this model?

The terminal value is calculated using the formula: Free Cash Flow for 2035 divided by the weighted average cost of capital (WACC) minus the long-term growth rate (6%). This represents the present value of cash flows from 2035 onwards.

What is the weighted average cost of capital (WACC) for Broadcom?

The WACC for Broadcom is calculated at 10.96%. This is derived from a 7.5% cost of debt, a risk-free rate of 4.2%, and a market risk premium with an equity portion of 90% and debt at 10%.

Why does the analyst use a margin of safety in their valuation model?

A margin of safety is used to account for the uncertainty and potential errors in the estimates and assumptions made during the valuation process. It helps mitigate the risk of overvaluation due to inaccurate predictions.

What free cash flow growth rate does the analyst use from 2029 to 2034 for Broadcom?

The analyst uses a 10% growth rate for Broadcom's free cash flow from 2029 to 2034, which reflects a transition period as the company's growth rate slows down from 20% to a more sustainable rate.

How does the beta of 1.19 affect the cost of equity in the WACC calculation?

The beta of 1.19 indicates that Broadcom's stock is more volatile than the S&P 500. This means its risk premium is higher, which leads to a higher cost of equity, as the company’s stock price tends to magnify the market's movements.

What are the free cash flow estimates for Broadcom from 2024 to 2028?

The free cash flow estimates for Broadcom from 2024 to 2028 are as follows: $21 billion in 2024, $30 billion in 2025, $35 billion in 2026, $41 billion in 2027, and $44 billion in 2028.

What is the purpose of the DCF model in this analysis?

The DCF model is used to estimate the intrinsic value of Broadcom's stock by discounting its future free cash flows to the present. This method helps determine whether the stock is fairly valued, overvalued, or undervalued based on the company's expected future performance.