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broadcom is an interesting semiconductor stock that a lot of investors have been asking about in this video what I'm going to do is come up with an intrinsic value per share for broadcom stock and answer how much the stock is worth today according to these calculations now price conclusion so I'll from so you can make a determination if I'm using numbers that are too high or too low or maybe I'm using numbers that are right on point according to your opinion regardles for full transparency need is broadcom's current market cap which stands at $859 billion in which stands at 4.66 3 billion I need the company's long-term debt which is near $70 billion and I need their cash and equivalence balance which is 9.95 billion I also need the company's beta which according to Yahoo finance stands at 1.19 and finally I need the company's cash flow estimates free cash flow estimates for the next several years and so you can see here according to Wall Street analyst.
are following broadcom stock they think the company's free cash flow will come in at $21 billion in 2024 it'll rise to $30 billion in 2025 jumping to $35 billion in 2026 up to $41 billion in 2027 and lastly $44 billion in 2028 it would be an under statement to say that the analyst on Wall Street expect bullish growth from broadcom in terms of free cash flow over the next several years between now and the year 2028 all right so now that we have all the estimates and numbers we need for the valuation we can jump into the FCF model the DCF model let me first draw your attention here to the free cash flow now I know there's a lot of numbers on the screen and it can be intimidating the numbers so don't get intimidated I'm going to break it down and simplify things you don't need to be a financial expert to understand this discounted cash flow valuation model just follow along here I'll take you through one step at a time so free cash flow in 2024 estimated at $20.93 billion and then I have the cash flows growing as I shared with you where I got the numbers from over these next several years all the way to 2028 I got the numbers from the Wall Street analyst that were following the stock here right $44 billion okay from this point onward from 2028 onward so starting in the year 2029 up until 2034 I created my own forecast for broadcom's free cash flow growth because I didn't have the numbers available from Wall Street analyst estimates so in these first few years the Wall Street analyst growth rate for the free cash flows when I took the compounded annual growth rate over those several years that Wall Street was for casting that was a growth rate of 20% so I'm going to have the company growing at years 2029 to 2034 at half of that rate at 10% growth a transition period right because companies typically go through a transition period and their growth rates slow down they don't abruptly slow down they don't go from 20% down to 5% abruptly in most cases they Trend downwards they transition downwards and so that's why I'm creating that transition period of growth okay so those are the cash flows between 2029 and 2034 I'm having them grow at the transition period growth rate of 10% finally starting the year 2035 I have the company's cash flows growing at its long-term growth rate of 6% longterm growth rate of 6% okay and when you're doing the discounted cash flow valuation model you can go on like this and discount those free cash flows all the way out to Infinity I can forecast those free cash flows all the way out to Infinity however there's a shortcut that we use in finance it's called the terminal value calculation it collects all of the cash flows that are expected between the year 2035 to Infinity because theoretically a corporation can last forever so you can collect all those expected cash flows from 203 5 to infinity and you can bring them all the way back to this point in time in the year 2034 now the formula for this equals the free cash flow one year ahead growth rate I already shared with you the growth rate of 6% let me share with you the weighted average cost of capital calculation so the wacc for broadcom I have at 11% the way I arrive at this calculation is a company can be financed in only two ways either through Equity or debt and so a company must choose its capital structure how much Equity does it want how much debt does it want debt usually comes at a lower cost of capital so companies prefer increasing their debt as they mature and as they become larger so in this case I have the cost of debt for broadcom I apply a 7.5% cost of debt the way I arrive there is I take the risk free rate of 4.2% and I add roughly 300 basis points as a risk premium to jump from a US Government Bond where you can get 4.2% into a bond of broadcom where you can get a little bit more but it also comes with more risk so I'm applying 7 and a half% okay to get the cost of equity I use the capital asset pricing model which takes the risk-free rate and then it multiplies the beta times the market risk premium because again you can invest in a Government Bond which is theoretically zero risk or you can invest in broadcom stock which is riskier than a Government Bond so you have to add that risk premium to the Government Bond and one of the ways you do that is you take the beta which measures how risky a stock is compared to the s&p500 index a number above one means it's more risky a number below one means it's it's less risky so 1.19 means that theoretically when the S&P 500 goes up by 1% broadcom stock should go up by 1.2% and the same thing on the downside when the beta is 1.2 if the S&P 500 goes down by 1% broadcom stock should go down by 1.2% so it just magnifies the return of the s&p500 by roughly 19 percentage points right so combining all of that together I get the weighted average cost of capital of 10.96% also I forgot to mention I'm giving them a capital structure of 10% debt and 90% Equity because they have $70 billion in debt and a market cap of $860 billion we can go ahead and discount these cash flows so all of those cash flows that I forecasted here all the way to 2035 you can see the numbers below that are the discounted cash flow because money in the future is not worth as much to you as money today and so if you have to delay receiving that money it's worth less that's why you discount the cash flows that's why it's called a discounted cash flow valuation because you're discounting these cash flows that you expect to receive at some point in the future so once we're finished discounting all of those cash flows combining them summing them all up I get a value of operations for broadcom business today at $875 billion but we're not done yet right we're almost done to this value of operations we got to take and add the company's cash and then subtract the company's debt to give us a value of equity of $815 billion from this total right we divide the number of shares outstanding because we want to know the price per share this gives us the price of the whole company we want to know the price per share and so when you divide the 4.66 billion shares out standing you get an intrinsic value of roughly $175 for broadcom stock which compared to today's market price of $183 I would say it's roughly fairly valued I give myself a margin of safety of roughly 10 5 to 10% when doing these discounted cash flow valuation models because as you noticed I'm using a lot of estimates and assumptions so just because I find that $8 difference doesn't mean I'm going to jump to a conclusion and say the stock is overvalued let me short this investment that's not what I do this for I do this to find if there's any large misplacements in valuations and to give myself an approximation of valuation and as you've seen on my channel I use various forms of valuation to come to a conclusion on whether or not a stock is a buy hold or a sell
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