Broadcom (NASDAQ: AVGO) stock price has gone parabolic since the company published encouraging financial results last week. It soared to a high of $1,828 on Monday, pushing its market cap to over $807 billion.
Strong growth but overvalued
Broadcom had a great first quarter as demand for its chips and software solutions continued rising. Its revenue surged by 43% to over $12.4 billion while its adjusted EBITDA jumped by 59% to $7.4 billion.
The spectacular revenue growth was also because of its artificial intelligence (AI) business, which generated $3.1 billion in revenues. VMware, a company it acquired in 2023 also contributed to the spectacular growth. Excluding VMware, its revenue was up by 12%.
Broadcom also upped its forward guidance and it expects that its annual revenue will jump to over $51 billion this year. Its adjusted EBITDA will be about 61% of revenue.
The company’s results reflects the strong demand for AI and the fact that companies are accelerating their tech investing. Nvidia, the biggest chip company in the world, reported revenue growth of over 200% in Q1. Super Micro Computer also had substantial growth.
The biggest challenge for investing in Broadcom is that, like Nvidia, it has become highly overvalued. Data by SeekingAlpha shows that it is trading at a price-to-earnings ratio of 76 and a forward multiple of 88.
These are huge numbers since the sector median stands at 30 and 29. The S&P 500 has a forward P/E ratio of 21. Broadcom’s forward EV to EBITDA metric stands at 16.9, higher than the sector median of 2.93.
The other issue is that Broadcom has become a highly indebted company with over $71 billion in long-term debt. Still, this is not a big concern for now because it is generating over $5.3 billion in free cash flow per quarter.
Despite these issues, there are reasons to be bullish on Broadcom stock. First, in the short-term, the upcoming stock split will likely lead to more demand among traders and investors.
Second, there is substantial demand for Broadcom’s products and services. Its chips are seeing elevated demand while its software platforms continue to grow.
Further, from a technical perspective, as you will see below, has the bullish momentum it needs to keep rising. This price action is reminiscent of what happened with a company like Nvidia.
Broadcom stock price forecast
The weekly chart shows that the AVGO share price has been in a strong bull run for a long time. In this period, it has remained above all moving averages, a sign that bulls are in control.
The Average Directional Index (ADX) has moved to over 40. The ADX indicator is a popular tool that measures the strength of a trend. Further, it has moved above the ascending channel shown in red.
Therefore, the stock will continue soaring as buyers target the key resistance at $2,000. If this happens, it means that Broadcom will be the next big company to attain a market cap of over $1 trillion.
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