원문 보기
Many of you have asked me for an update on AVGO stock. The stock is down 8% over the last 5 days and I got so many questions, so I'm going to talk about AVGO again. It's going down for three main reasons. Pretty bad stuff that's been talked about the company and I'm actually a big fan of the company.
I don't own AVGO yet, but I like the management team a lot. I think they have an amazing track record of doing acquisitions and they did a lot of very successful ones. In fact, Broadcom itself was an acquisition of AVGO in 2016, reshaped the company and they did a lot of them. Pretty talented management team.
They have about 78% gross margins, very efficient business, very high gross margins. Net revenues have been growing like never before. The company makes money in two main ways. The first one is in semiconductors, mainly in the custom silicon chips. Google's CPUs are made by AVGO. I think OpenAI and Anthropic chips that they're doing are made by AVGO and so many companies.
I think AWS is also with AVGO and there are so many companies that pretty much use AVGO as their number one choice to create their own custom silicon chips and I think AVGO is on the right trend over here as a lot of companies are looking to expand CapEx and expand their semi spending while you could say being more efficient and the best way to do it is to create their own chips through a company like AVGO.
The second one is mainly in software like VMware which the company acquired, I believe in 2023. Now, AVGO has been going down for a few reasons. The first one, which was by far the most important reason, but not the only reason, is due to some kind of a cybersecurity or security exploitation of their VMware software.
That was a big one in over 47 countries, 361 IP addresses. And it sounds very serious. Now, I'm going to be honest with you. I'm not a cybersecurity expert, but I'm sure AVGO has a talented management team. They have a lot of resources. They're likely to recover from this, and they're likely going to strengthen, you know, their security capabilities within VMware.
And I think the company will be fine. I'm not really worried about the cybersecurity stuff with VMware. I'm more worried about the two other reasons on why the stock is going down. One of them is SemiAnalysis, which is a popular semiconductor analyst on X, on Substack, very popular guy. Now, he's saying that there's some market chatter suggesting that Google is working with AMD on a TPU project in the V10 generation.
So, they're pretty much implying that Google is diversifying away from AVGO to use AMD for custom silicon. But AMD makes most of their money, their fat gross margins, by selling their own chips. If they're going to make custom chips, it's not going to be as profitable for them, and they haven't done it in a while.
So, I'm not really seeing how that's going to happen. It's still market chatter. That's what he's suggesting. So, there's no proof of that yet. But I personally don't feel like this is realistic for a company like Google to to drop such a long-term partnership, successful partnership, with AVGO and go to AMD.
I'm just personally not seeing it. And you have to remember I'm sorry, that this guy, SemiAnalysis, now has some kind of an ETF or some kind of a hedge fund. And a few weeks ago, he dropped a very negative report on a lot of the photonic stocks. And the photonic stocks went down. After they went down, he bought the dip in his own fund, you know?
So, is he doing the same thing to cause a sell-off in AVGO so he could buy the stock cheaper? I don't know. We've seen that some chance I don't know things and there's some, you know, conflict of interest over here when you have someone that's so influential. So, that could be another case of something that's pretty much going to end up being nothing, and we don't know yet until we see it, but I personally don't see this being realistic.
Now, there's a third reason why the stock went down, and that was mainly from a report from Wolf Research, which is a reputed firm, and they estimate that the 14 gigawatt of planned Open AI and Anthropic capacity for 2028 could represent a 140 to 200 billion of revenue versus 245 of total consensus ABGO revenues that year.
So, they're estimating a lower revenue profile for ABGO, and that sounds really, really bad on the surface. Now, Howard Marks says, "It's not really what we buy, it's how much we're paying." So, there's clearly some risks with ABGO. There's the risk that Google could be diversifying away from them, and ABGO will be fine.
They have a lot of customers. There's more uh demand than supply, and they're the best in the game. There's also some concerns on the VMware cybersecurity threat, and there's also a concern around their 2028 potential revenues. Now, if we look at how much we're paying for ABGO, uh you're paying about 24 times earnings.
Uh 24 times earnings is not expensive at all for a company that has the margins that ABGO has, that has the growth of about 70%. They grew this year in 2026. earnings per share. Next year, they're expected to grow 68%. The year after, 35%. Even if half those growth numbers materialize, 24 times earnings is not expensive at all.
So, if ABGO was still trading at 40 times earnings with such news, I'm like, "Guys, this is really, really bad, and the stock is way overvalued for those potential risks." But, those are still potential risks, mainly, you know, the Google partnership, maybe it doesn't materialize. But even if it does, you know, you're not really paying so much for a company like AVGO, especially relative to AMD and other semi investments in the market.
So, I don't think AVGO is overvalued here. I ran evaluation model on AVGO. The analysts, I told you guys they have about 68% growth for next year and 35% for the year after. I used 50% instead I used 30 instead of 35. Then I priced in a deceleration to 25, 20%, 20%, which I believe is likely. The current trailing PE is 34 times.
I took it to 20 times earnings because I believe a multiple contraction is warranted if a company decelerates in revenues. And that would be again a one price to earnings growth, which would be very cheap, but I'm using 20 times earnings. Now, even after all those estimates, I'm getting about $816 per share.
Or about a 15% annual return or a double over the next 5 years if we're buying AVGO today. Now, let's assume 25 times earnings as a best-case scenario. Now, if that happens, I'm still getting about 160% on the upside. Or about a 21% annual return for buying AVGO at today's price. So, I agree that there's some risks with AVGO, some companies that could potentially diversify away from AVGO.
There's a cybersecurity risk and a few risks. Every investment has some risks. There's no risk-free investment. But if I look at where the valuation is, I'm not really seeing AVGO extremely overvalued. Now, if you're very picky like me as a value investor or a value-oriented investor, if you could buy it at around 20, 21 times earnings, you know, it has bottomed historically low 22 times earnings.
Now it's trading at 24 times, so that's like a 10% lower than where it is today. And not not not the worst move in the world, but I believe the stock is fairly valued, and that's my opinion on AVGO. Uh video.
Comments 0