Broadcom won this week’s poll, so I took it apart live. I’ll be upfront, the same way I was on the Live: I’m not an expert in this company and I don’t own it. That made it a good one to learn on, because I had to work through the whole business in Stock Simplifier the same way you would.
We covered what Broadcom actually sells, how strong the moat really is, growth that’s hard to believe, the risks that come with it, and then the valuation question everybody came for.
If you only have a few minutes, jump to the valuation at 14:03 and the reverse DCF at 16:17.
What we covered
- 0:00 Intro
- 0:31 Broadcom at $343: a $1.64 trillion toll booth
- 1:28 Five-year returns: 45.2% a year against 10.8% for the S&P 500
- 1:59 Margins, balance sheet, and growth at a glance
- 3:30 What Broadcom actually sells: custom AI chips and infrastructure software
- 4:34 The segments, the customers, and the geography
- 5:33 Predictability, pricing power, and competitive position
- 7:04 Phase analysis: a company returning capital
- 7:39 The moat: switching costs carry it
- 8:52 Growth: AI silicon drives everything
- 10:16 Management: Hock Tan and a near-unbroken beat record
- 12:30 The risks: customer concentration, TSMC, and the AI spending question
- 14:03 Valuation: P/E against its own history and the market
- 15:43 Price to free cash flow
- 16:17 Reverse DCF: what $343 requires
- 18:09 Free cash flow history, before and after AI
- 20:18 Buybacks versus stock-based compensation
- 20:53 Dividend health and yield on cost
- 21:48 Summary and my verdict
- 22:17 Wrap-up and next week
Where I landed
Broadcom is an incredible business, and the price is more reasonable than the headline multiple suggests. I’m still not buying yet.
- Margins scream capital light: 68% gross, 48% operating, 42% net, and 44% free cash flow
- The P/E of 43.8 looks high against the market’s 26.4, but it sits well below Broadcom’s own five-year average of 52.8
- The reverse DCF says $343 needs free cash flow to grow about 15.9% a year over the back seven years, after 18% over the first three. Broadcom has grown free cash flow faster than that over the last three, five, and ten years, and still did 16.6% a year from 2006 to 2016, before AI was a factor
- The biggest risk is concentration. One customer was 32% of revenue, about 95% of the wafers come from TSMC, and 56% of revenue comes from Asia Pacific
- The buybacks mostly offset dilution. Broadcom spent heavily on repurchases, but $26.1 billion of stock-based compensation means the share count still went up over five years
- The yield is only 0.74%, but the dividend is growing fast and free cash flow covers it easily
My verdict: fairly valued, and maybe even attractive depending on your risk tolerance. It goes on my watch list. I want to understand the company better before I buy. I already own Taiwan Semiconductor and Applied Materials, so I have chip exposure, but I don’t own a fabless designer yet. Broadcom is the one I’ll be watching.
Next week
Apple came in a very close second in this week’s poll, so it may be next. I’ll put out a new poll so you can pick the company. Same time, Thursday at 10 a.m. Eastern.
If there’s a company you want me to take apart on a future Live, leave it in the comments.
Disclosure: I own shares of Taiwan Semiconductor and Applied Materials. I do not own Broadcom. This is education, not investment advice.