Broadcom is high quality with custom AI chips and strong free cash flow, but at 42 times free cash flow and 43 times earnings it is too expensive; AI growth and margins may disappoint. Modeled value ranges $115–$830, averaging $315 vs about $340 now; buy only near $206–$220 for a 15% return.

Broadcom saw its sales grow by 85.5%, but its stock has fallen 30% from its all-time high of $495 in June to around $340 at the time of speaking.

If you bought the stock near the top, you're losing about $155 per share, and Wall Street says it's selling at an unbelievable price, about 45 % less than what experts believe is its true value.

So, is this an unmissable opportunity or a trap? Today, we will present three positive and three negative cases, and then we will analyze the numbers to determine the true value of Broadcom based on my own assumptions.

Okay, here's what's happening. Broadcom's business is booming. As I just mentioned, revenue for the last quarter increased by 85.5% year-over-year. This means that this year's revenues were 85.5% higher compared to the same quarter last year .

As you know, revenue is simply the total money that comes in from sales, but the stock has not kept pace with this growth despite all of this. The stock price is currently almost the same as it was a year ago. So why?

Well, there are two main reasons. First, people are worried about the economy. When people feel scared, they sell first and ask for reasons later. Secondly, some people have begun to question artificial intelligence.

They are wondering: Will all this spending on artificial intelligence really continue? I want to point out that we feel we were among the first to say, "Guys, this is all great, but if it doesn't last, when will it become a problem?"

And of course, Broadcom found itself embroiled in this matter. That's why the headlines are so noisy right now .

Morning Star is a large company that rates stocks. Broadcom has been given a five- star rating. This is its highest rating. Morning Star says the stock is worth about $650 per share.

Another site, Simply Wall Street, says its value is $651 per share. Even Jim Kramer, even he has gotten involved . He said the decline made the stock too cheap to ignore, and told owners: "Don't sell at this level."

Guys, I want you to keep in mind that I don't support any of these people . If you're new to the channel, I think Jim Kramer is an idiot. He is a day trader. He is not an investor.

But what people say about a stock's short-term value and what it is actually worth in the long term are two very different things.

So, let's get into the positive cases. If you own the stock, you need to understand exactly what the optimists are saying . The first argument for ascension . Broadcom builds custom AI chips for the world's largest technology companies.

Here's how I think about it. Much of artificial intelligence works on chips called graphics processing units (GPUs). Those are ready-made chips available in the markets. Consider buying a ready-made suit from the store.

It works, but it can be costly in the short and even long term because it doesn't do exactly what you want it to. It is not tailored exactly to your size. Therefore, the same applies to chips.

These giant technology companies want their own chips. She wants it custom-made, like a tailored suit , to meet her needs precisely. This may make it cheaper in the long run because they get exactly what they want. Who do they contact ? Broadcom.

Broadcom is the only partner helping Google and Meta build their AI chips. Broadcom has just signed a deal with OpenAI, the company behind ChatGPT , to help design a chip called "Jalapeno ".

This is the type of chip that answers you every time you ask a question on ChatGPT. This isn't a one-time deal, guys. It covers more than one version of the chip . It extends to include multiple versions.

Optimists say that once Broadcom starts designing its chips, it becomes difficult to switch away from them. Morning Star calls it the wide economic moat. The moat is the water surrounding the castle. It keeps the competition out.

The second argument for ascension . Broadcom itself anticipates tremendous growth in artificial intelligence. The company has raised its estimates for what it expects to earn from artificial intelligence in 2026.

Now, folks, the new figure for AI chips alone was $58 billion, up from their previous estimate of $56 billion. They have devised a plan that, if you combine all AI sales up to 2028, will yield $230 billion.

Guys, they've also raised their revenue forecast to $110 billion. They made only $90 billion last year. This is a huge leap. This is an increase of more than 20%.

This, folks, is not just a guess from an outside analyst. This is the company telling you where it thinks things are headed. Take it with care sometimes because it is very rare for a company to come out and say, "We're rather bad.

Things aren't going to be good." So, just remember that.

But optimists say that even if Broadcom gets close to these numbers, the business will look much bigger in a few years. The third argument for the rise of VMware is that it turned Broadcom into a money-making machine.

Broadcom bought a software company called VMware, and that changed the whole business. Chip sales are inherently very volatile . It rises and falls with the economy. In boom years or recession years, companies pay for software every year without fail.

These funds are much more consistent and stable. So , when the chip industry slows down , software will help cushion the shocks.

This liquidity is real. In the last quarter alone, Broadcom generated $13.67 billion in free cash flow. Free cash flow is the cash left over after all bills have been paid and after reinvesting in the company as capital expenditures.

And guys, this is all in just 3 months. If you calculate it on an annual basis, the amount would be approximately $56 billion in free cash flow. This cash is what covers the dividend distributions.

Dividends are the cash that a company sends you simply for owning a share. Optimists believe this makes dividend payouts highly reliable and designed for growth.

Now, let's reverse the verse. Whether you own the company, want to buy it, or avoid it, it is very important to understand the pessimists' point of view on Broadcom. You should definitely understand both sides of the coin, but remember , just because there are three arguments for each side does not mean they are of equal importance.

It is our job as investors to see which of them will have the greatest impact on the business.

The pessimists' first point of view : putting too many eggs in one basket. Guys, a large portion of Broadcom's custom chip money comes from three giant tech companies . This is risky.

What if one of them decided to design its own chips or changed the way it built its devices? If Google or Meta were to withdraw, billions of dollars in sales could be lost with them.

The second pessimist's point of view: Apart from artificial intelligence, things are not so rosy. Artificial intelligence is grabbing the headlines, but Broadcom also makes chips for home internet, wireless, and storage.

These businesses are experiencing a period of stagnation. Sales there are flat or lower than last year because companies aren't spending as much. Furthermore, Broadcom is converting VMware customers to a subscription system.

This means they pay every year instead of just once. If this conversion process goes badly, some customers may leave .

The third pessimist viewpoint : The market may be overly optimistic. Do you remember the figure of $230 billion by 2028? Pessimists say that this can only be achieved if everything goes perfectly.

Currently, large companies are spending huge sums of money to build artificial intelligence data centers . Those are giant buildings filled with computers. But this spending cannot continue to rise forever .

If things settle down by 2028, Broadcom may miss its targets. Wall Street will then lower its expectations, and what will happen next? The stock can fall very quickly .

For this very reason, our fifth principle of principle-based investing is that even a great company and a remarkable story at the wrong price will end up being a bad investment.

So, who is right? Optimists and pessimists, both could be right, folks. They may both be right, but the question is, which one will have the greater impact on the business? Fortunately for us, we are here to do the math, taking into account both optimistic and pessimistic scenarios, and see where the stock falls on the value-price spectrum.

So, this is what we will do now. Now, remember, guys, never take our title and thumbnail literally . We are not here to provide investment advice. We are here to teach you a process that you can one day take and apply to your own investments.

So, let's take a look at Broadcom and see what its situation looks like. AVGO. Guys, everyone is looking at the stock price to see the value of the company. I don't do that. I want you to look at the market value.

This is the total outstanding shares multiplied by the share price. It is simply manipulation of existing shares that affects the share price. That's all there is to it . If a stock split occurs, nothing has changed. This stock is worth 1.66 trillion.

Next, although they borrowed money to buy VMware , they don't have much debt here. Their organization is valued at 1.72 trillion. This difference of $60 billion is essentially their debt.

It may seem like a large sum, but not when you generate $40 billion in free cash flow last year and $23 billion annually over the past five years. You can easily imagine if, after paying off all your expenses as a person , everything— mortgage, taxes, insurance, maintenance, cars, everything—you were left with $1,000 at the end of the year.

That is equivalent to $10,000. Imagine if all your debts combined amounted to $15,000. This is the same thing. All your mortgages , your car loan debt, everything , had balances of 15,000.

This illustrates how low this figure is relative to their cash flow.

But the question is, is this cash flow stable? Okay, something else I'm looking at. Return on capital of 20%, and 17% annually over the past five years. It's a great quality measure.

It indicates that this company is good at managing money and getting a return on the money it invests in its business. This is a good quality measure. You want to see these high numbers.

Now, one thing is for sure: these 0.73% dividend payouts are consuming $12 billion of their free cash flow . Next, look at their profit margin. 29 % annually over the past ten years, 33% over the past five years, and 43% last year.

That's why I have concerns about the future. How will they suddenly go from operating with a 30% profit margin to 40 or 45% permanently? It might happen , but it happens to everyone .

I find it hard to believe that everyone will win in the field of artificial intelligence.

And now, one more thing, guys, the story is great so far. It sells for 42 times free cash flow and 43 times earnings. That's too much . Now, if you think they're going to double their profits every year for 20 years, this is the cheapest company ever, and you'd have to sell everything to buy it.

But this is not realistic. But I say this as a way of showing that this metric alone does not determine whether a company is good, expensive, or cheap.

Now, let's examine the eight pillars. Incidentally, members of our community consider this company a buying opportunity right now. You can see that here. Purchase rating by our community members.

Okay, let's move on to our eight pillars. So guys, I'm really surprised by this. The outstanding shares rose by 13.65%. I wonder if this is related to their acquisition of VMware.

Did they issue shares in return? No, it was just...oh, wait, was it? When did they buy VMware?

So, let's move on to our artificial intelligence tool. When did Broadcom acquire VMware? Guys, this is what I love about our internal AI tool . I'm opening it right here. It is powered by ChatGPT.

There is no need to worry about closing the windows, doing all these things, etc. Oh, look at that. This is when they issued their shares. They completed the acquisition on November 22, 2023.

Did they issue shares to complete this acquisition? Half of it is in shares. I love this. You gave me an answer, and now I will ask the next question. I never need to leave the screen.

Yes, Broadcom paid for VMware with a combination of cash and newly issued Broadcom shares . So, guys, what I just did was look at the graph and say, "Wow, why was there such a big spike?"

We have talked about VMware. Well, maybe that happened back then . Or I could have asked: " Wait, why did their share count increase so much during that period of time?" The program would have told me that. That is the strength of our program.

Okay, next. High returns on capital. Cash flow is high, net income is high, revenues are high, and debt is low. The five-year price-to-earnings ratio and the five-year price-to-free cash flow ratio are very high. Good.

Guys, I'm going to say this about every AI company forever . I mean, for a while . Are their revenues and profits in a state of constant stability? Isn't there a chance it will decrease?

I don't know . I don't think this will be the case for everyone, but it will be for some players.

So let's see what the analysts think about this . Analysts believe they will grow . Oh my God, look at this growth. $11.60 per share this year, to reach $35 per share over the next four years.

This is growth of 72%, 69%, 35%, 22%, and 8%. That's a huge growth, guys. It's a significant growth, but what's interesting is to look at this revenue growth. From 105, to peak at 290 , then drop to 139.

That's interesting. And guys, it's not like there's a habit that whenever I see this big drop, I think it's, you know, one or two analysts who are pessimistic. There are 17 analysts who offer this estimate here, within this range.

I'm somewhat surprised by that . I wonder if they know something we don't. This is very interesting.

So, guys, before we analyze this company, I've shared a lot with you here. The main reason for this is that I am here because I realized how wrong the world's view of investment is.

They mostly see it as a story, and you pay a price for a story. But what that means is that there is no extremely high price . Guys, there's always a very high price to pay for any story that exists .

I've put a lot of key metrics there for you to look at. Those were all the metrics I had circled on that page. I want us to speak the same language. That's why I have a completely free PDF of the key metrics, plus a complete analysis of Broadcom in one PDF file ready for you completely free of charge.

Click on the link below and download it completely free, because I want you to always get the most out of these videos, especially when we analyze individual stocks. So even if you have no desire to own Broadcom shares, download it anyway so you can get more iteration in reading about this type of investment.

And here we are with the stock analysis tool. Here we put the story and the numbers together to determine the appropriate price that should be paid . Okay, first I did a 10- year analysis.

Guys, the next thing I want to show you is to look at this improvement in capital returns . The ten- year number is 11.9, and the five-year number is 17.4. The problem I am facing is that if the five-year figure is 17.4 and the ten-year figure is 11.9, this means that the percentage ten years ago was in the high single digits at best, and perhaps in the middle.

Is this solely due to the company's recent good performance? This is a source of concern for me.

The ten-year number is 11.9, and the five-year number is 17.4. The problem I am facing is that if the five-year figure is 17.4 and the ten-year figure is 11.9, this means that the percentage ten years ago was in the high single digits at best, and perhaps in the middle.

Is this solely due to the company's recent good performance? This is a source of concern for me. After that, I analyzed revenue growth.

Guys, I've analyzed revenue growth for 10 years. Um, I chose revenue growth of 5, 15 and 25 percent. It's a very broad range. I will probably change this. The reason I chose the 5% figure, i.e. the pessimistic state, is that it may rise and if it falls, this allows it to recover a little and its average may reach 5%.

I'm guessing here. I don't know if this is true, but our goal here with a stock analyst is to make reasonable assumptions about low, medium and high levels and see where the stock falls.

Let's assume it reached a price of $5000 as a value on the low side. I'm going to buy that stock like crazy. That's the basic idea here.

Okay, now profit and free cash flow are equal. But, in the past, they were certainly far apart. However, it would have been better if the free cash flow had been greater than the profit margin.

So, I'm going to focus on free cash flow here, guys. Now, what's interesting here is that this free cash flow hasn't changed much over the past ten years. This is strange to me.

So, although their free cash flow has increased, and although their revenues and profit margins have increased, their free cash flow ratio has remained the same. Not the total dollars, but the percentage of revenue.

This makes me feel better , so I've removed the profit margin entirely. I will rely on it , I don't know why I chose 4 when 38 is here. Let's choose 39, 42, and 45. This seems reasonable to me.

Next, what is the price of free cash flow? Since I am eliminating the price-to-earnings ratio, what is the free cash flow rate I will allocate to this company 10 years from now?

Well, yes, they have high returns at the moment . But is this only because the business is good? What if the work gets a little slow? Will it drop sharply? I still think it's an excellent company because they have a big advantage in their market. So, I put 16, 19, and 22.

Remember, my way of thinking is that if the long-term average in the S&P 500 is between 15 and 17, I should ask: Is the company I'm analyzing doing better or worse than the average of companies in the index?

If it's better, raise the numbers above this level. If it's worse, lower the numbers. If it's average, I stick to the same level. Guys, I can already understand what's going on here.

I will indeed lower the numbers in this case . I would choose 14, 18, and 22.

I have a low price of 115, a high price of 830, and an average price of 315. Guys, the price is currently at 340, so it's not far from my average price. Now, guys , for me, given that I own a lot of real estate and many businesses, I've decided that I want a fantastic deal to buy a company.

I used to achieve 12%. I am now making returns of 15%. So, for me, I have to wait until this company's price reaches either 82, or 530 on the high side, or 206 in the middle. So, guys , do you know what I'm going to do ?

I will add it to my watchlist now at a price of 220 per share.

You might say, "Well, Paul, you just mentioned 206." Okay guys, I want to be prepared to re-analyze the company before it reaches that price, and maybe sell some cash-covered "put option" contracts.

So, what does that mean? Well, I'm happy to have bought the stock at 206. But, let's suppose, for the sake of argument, that I was happy to pay 325 for the stock today. The price is currently at 340.

Well, the great news is that I am able to use cash-covered put options to get someone to pay me to wait for the stock to drop to 325. Now, the key point here is that I should be comfortable waiting.

I should be comfortable saying that I will not buy it today.

First, what is a put option? A put option is a deal between two people. Someone pays another person a small amount of money today. In return, I promise that I will buy the stock at that specified price if it falls to that price or lower on the expiry date.

For example, let's choose a date. Let's go to November 13th. Let's say I wanted to pay 325 per share. This is the put options section. I'm going to 325. Guys, there will be someone willing to pay me $7.55 per share to buy the company at 325 or less.

So, in essence, I am actually buying it at 325 minus 755 because I am holding onto the 755 no matter what happens. If the share price is less than 325 on November 13, I will get the share at 325 minus my 755.

Now, what happens if the stock stays above 325? I kept my 757 while my cash waited, holding that amount, and I achieved an annual return of 29.3% on my cash.

Now, guys, there's a key point here. If you're not feeling comfortable, there's a possibility: what if Broadcom's stock drops to 250? I am still paying 325 for that, minus my 755.

This is the difficult part that people face with guaranteed cash sale options. But if you are disciplined, and if you know what you want and why, you can make a lot of money from your cash flow and buy stocks at cheaper prices.