AVGO

Fundamental Analysis

Income Statement:

Key Findings and Trends

1. Revenue Growth:

   • Total revenue has increased significantly over the period, growing from $27.45B in 2021 to $51.57B in TTM 2024, a 87.9% increase over three years.

   • The most substantial growth occurred between 2023 and 2024, where revenue increased by $15.76B (44%).

2. Gross Profit Expansion:

   • Gross profit has increased from $16.84B in 2021 to $32.51B in TTM 2024, reflecting a nearly 93% rise.

   • The gross margin has remained strong, though Cost of Revenue has increased, particularly in 2024, reaching $19.07B compared to $10.6B in 2021.

3. Rising Operating Expenses:

   • Operating expenses have more than doubled from $8.18B in 2021 to $17.51B in TTM 2024, outpacing revenue growth.

   • This increase is notable in 2023-2024, where operating expenses jumped by $9.27M (112%).

4. Declining Operating Income:

   • Despite revenue and gross profit growth, operating income declined from $16.45M in 2023 to $14.99B in TTM 2024.

   • This suggests a margin squeeze due to rising expenses.

5. Higher Interest and Other Expenses:

   • Net non-operating interest expense worsened significantly, growing from -$1.87M in 2021 to -$3.49B in 2024.

   • Other income/expenses also showed a larger negative impact in 2024 (-$1.59M vs. -$33K in 2021).

6. Pretax Income and Net Income Decline:

   • Pretax income peaked in 2023 at $15.1B but then fell by 34% to $9.92B in 2024.

   • Net income followed the same trend, dropping by 58% from $14.08B in 2023 to $5.9B in 2024.

7. Earnings Per Share (EPS) Decline:

   • Basic EPS dropped from $3.39 in 2023 to $1.19 in 2024, a 65% decrease.

   • Diluted EPS saw a similar decline from $3.30 to $1.16.

8. EBITDA Trends:

   • EBITDA increased from $14.69B in 2021 to $23.88B in 2024, showing strong operational performance.

   • However, EBITDA growth slowed in 2023-2024, rising just 16%, compared to 30%+ in prior years.

Summary:

• Revenue growth remains strong, but expenses (operating and interest) have risen dramatically, leading to declining profitability.

• Margins are under pressure, with operating income and net income both shrinking despite higher revenue.

• The decline in EPS suggests that while the business is growing, efficiency and profitability are worsening.

• The company may need to manage costs and improve operational leverage to restore earnings growth. ​

Balance Sheet: 

Key Findings and Trends

1. Massive Expansion in Total Assets (2024)

   • Total Assets grew significantly from $75.57B in 2021 to $165.65B in 2024, more than doubling in size.

   • The largest increase occurred between 2023 and 2024, where assets increased by 127% ($92.78B gain).

2. Surging Liabilities

   • Total Liabilities also more than doubled, rising from $50.58B in 2021 to $97.97B in 2024.

   • Between 2023 and 2024 alone, liabilities jumped by 100% ($49.09B increase), suggesting aggressive financing or expansion strategies.

3. Equity Growth and Strengthening Capital Structure

   • Total Equity saw a dramatic rise from $23.99B in 2023 to $67.68B in 2024, an increase of 182%.

   • This suggests that either new equity was raised or retained earnings significantly improved.

4. Capitalization More Than Doubled

   • Total Capitalization (Equity + Debt) increased from $64.39B in 2021 to $133.96B in 2024.

   • This suggests significant expansion efforts, possibly financed by a mix of debt and equity.

5. Net Tangible Assets Remain Negative

   • Net Tangible Assets stayed in negative territory, worsening to -$70.78B in 2024 from -$29.83B in 2021.

   • This could be due to high intangible assets, goodwill, or significant debt burden.

6. Debt Load Has Increased

   • Total Debt rose from $39.73B in 2021 to $67.57B in 2024, a 70% increase.

   • However, Net Debt (Total Debt minus Cash) more than doubled from $27.50B in 2021 to $58.18B in 2024, indicating a reduction in cash reserves.

7. Working Capital Decline

   • Working Capital (Current Assets - Current Liabilities) dropped significantly from $13.44B in 2023 to $2.90B in 2024.

   • This signals reduced liquidity and potential short-term cash flow concerns.

8. Share Issuance

   • Shares Issued increased from 4.13M in 2021 to 4.69M in 2024, likely from new stock issuances to fund expansion.

Summary:

• The company underwent a major expansion in 2024, doubling assets and liabilities.

• Equity has strengthened, but debt has also increased significantly.

• Liquidity concerns exist, as working capital dropped and net tangible assets remain negative.

• The capital structure suggests aggressive financing, possibly through debt and share issuance.

• Going forward, the company must balance growth with financial stability to ensure long-term sustainability.

Statement of Cash Flows: 

Key Findings and Trends

1. Strong Operating Cash Flow Growth

• Operating Cash Flow increased from $13.76B in 2021 to $19.96B in 2024, a 45% growth over the period.

• The most significant increase occurred between 2022 and 2023, growing from $16.73B to $19.96B (+19%).

• This suggests strong earnings quality and cash-generating ability from operations.

  
  

2. Significant Increase in Investing Cash Outflows (2024)

• Investing Cash Flow turned significantly negative in 2024 (-$23.07B) compared to -$689M in 2023.

• This suggests a major acquisition, capital expenditure, or investment strategy shift.

3. Financing Activities Reflect Capital Management Strategies

• Financing Cash Flow fluctuated, reflecting capital structure adjustments:

  • 2024: - $1.73B, significantly reduced from - $15.62B in 2023.

  • 2023 & 2022: Large outflows of $15.62B & $15.81B, likely due to debt repayments and share buybacks.

• Repurchase of Capital Stock increased from - $1.29B in 2021 to - $12.39B in 2024, indicating a major share buyback program.

4. Debt Issuance and Repayment

• 2024: Massive debt issuance of $39.95B, but $19.61B was repaid, leading to a net debt increase.

• Previous years: Limited debt issuance, with modest repayments in 2022 and 2023.

• This suggests a strategic borrowing decision in 2024 to finance expansion or acquisitions.

5. Declining Cash Position

• Ending Cash Position declined from $14.19B in 2023 to $9.35B in 2024, reflecting high cash outflows.

• While operating cash flow remains strong, large investments and share buybacks have reduced liquidity.

6. Free Cash Flow Remains Strong

• Free Cash Flow (FCF) grew from $13.32B in 2021 to $19.41B in 2024, indicating strong operational efficiency.

• Despite rising investments, FCF has remained positive, a good sign for financial health.

Summary:

• Operating cash flow remains strong, supporting business sustainability.

• Major investments in 2024 led to a sharp increase in investing cash outflows, possibly for acquisitions or expansion.

• Debt issuance in 2024 was substantial ($39.95B), partially offset by repayments.

• Large share repurchases (-$12.39B in 2024) indicate a shareholder-friendly strategy but have reduced cash reserves.

• Liquidity is declining, with a lower ending cash balance despite strong operational performance.

• The company must balance investment strategy with liquidity management to maintain financial flexibility. ​

Fundamental Analysis Summary:

Financial Health, Trends, and Outlook Summary

Overall Financial Health:

• The company has experienced strong revenue growth, nearly doubling total revenue from $27.45B in 2021 to $51.57B in 2024.

• However, profitability has declined due to rising costs, higher interest expenses, and an aggressive expansion strategy.

• The balance sheet shows significant growth in assets and equity, but liabilities have also surged, increasing the company’s financial leverage.

• Cash flow remains strong, with solid free cash flow generation ($19.41B in 2024), though liquidity has declined due to large investments and share buybacks.

Key Trends:

1. Revenue Growth vs. Profitability Decline

   • While revenue has surged, operating income and net income have declined, reflecting margin pressure.

   • EPS dropped sharply from $3.39 in 2023 to $1.19 in 2024, indicating weaker profitability.

2. Aggressive Expansion and Rising Debt

   • Total assets more than doubled in 2024, suggesting major investments or acquisitions.

   • Debt issuance of $39.95M in 2024 fueled expansion, but net debt has more than doubled since 2021.

   • While higher debt can be a growth enabler, interest costs are rising, impacting net income.

3. Shareholder-Friendly Moves with Risks

   • Significant stock buybacks (-$12.39M in 2024) suggest management confidence in long-term value.

4. Cash Flow Strength vs. Liquidity Risks

   • Operating cash flow is strong ($19.96M in 2024), meaning core operations generate sufficient cash.

   • Investing cash flow turned highly negative (-$23.07M), suggesting major capital outflows.

   • The company must balance investments with maintaining liquidity.

Outlook and Risks:

• Bullish Case (Optimistic View):

  • If revenue growth continues and investments translate into higher efficiency and profitability, the stock could see a rebound.

  • Strong free cash flow ensures that the company can fund operations without immediate liquidity concerns.

• Bearish Case (Cautionary View):

  • Declining net income and EPS could pressure valuation.

  • Rising debt and shrinking cash reserves make financial flexibility more challenging.

  • If costs and interest expenses remain high, profit margins may stay compressed.

Final Assessment:

• Financially strong but at a critical juncture. The company is in an expansion phase, which can either fuel future growth or overextend resources.

• Key watch areas: Margin improvement, ability to sustain revenue growth, and managing debt and liquidity effectively.

• Short-term concerns: Lower net income, shrinking cash reserves, and high capital spending.

• Long-term potential: If investments pay off and cost control improves, the company could see significant upside.

This is a higher-risk, higher-reward situation, with the need for disciplined financial management to ensure sustainable growth.

Valuation Insights

1. Earnings-Based Valuation (P/E Ratio Analysis)

• Earnings Per Share (EPS) Decline

  • 2024 Diluted EPS: $1.16 (down from $3.30 in 2023)

  • The significant drop in EPS could put pressure on valuation multiples, especially if the market expects further margin compression.

• P/E Ratio Trends

  • Assuming a stock price of $20 (hypothetical), the 2024 P/E ratio would be ~17.2x ($20 ÷ $1.16).

  • If using 2023 EPS ($3.30), the P/E would have been ~6.1x, showing the impact of earnings deterioration.

  • If earnings continue to decline, the P/E ratio could expand artificially, making the stock look more expensive.

    
    

2. Revenue-Based Valuation (P/S Ratio)

• Strong Revenue Growth, but Margin Pressure

  • Revenue grew by ~88% (2021-2024), but net income fell by ~58% YoY (2023-2024).

  • If using a Price-to-Sales (P/S) ratio benchmark, the company may look undervalued if growth sustains but could be overvalued if profitability continues to decline.

    
    

3. EV/EBITDA (Enterprise Value to EBITDA)

• Enterprise Value (EV) Calculation:

  • EV = Market Cap + Total Debt - Cash

  • Assuming a market cap of $100B, Total Debt of $67.57B, and Cash of $9.35B:

    • EV = $100M + $67.57M - $9.35M = $158.22M

  • EV/EBITDA for 2024 = $158.22M / $23.88M = ~6.6x, which is reasonable.

  • If EBITDA grows, this ratio could improve, making the company more attractive.

    
    

4. Discounted Cash Flow (DCF) Considerations

• Strong Free Cash Flow (FCF):

  • $19.41B in 2024, up from $13.32B in 2021.

  • If this trend continues, the intrinsic value could be higher than the market price.

  • However, negative investing cash flow (-$23.07B) and rising debt must be considered, as they reduce net present value.

    
    

5. Debt and Risk Premium Impact

• Higher Debt Load (+70% since 2021) = Higher Risk Premium

  • If interest rates remain high, borrowing costs could weigh on valuation.

  • Leverage increasing faster than equity could hurt long-term valuation.

Valuation Summary

• Stock may appear undervalued on a revenue basis (P/S) but faces margin risks.

• EV/EBITDA (~6.6x) suggests fair valuation if growth continues.

• P/E ratio (17.2x for 2024) suggests caution if earnings remain under pressure.

• DCF valuation could be attractive if FCF remains positive and debt is managed.

Technical Analysis:

Price Projection Date: 

3/31/2025

Price Projection: 

Based on a Monte Carlo simulation using the last six months of price data:

• Expected Price: $289.24

• Lower Bound (5% confidence interval): $179.61

• Upper Bound (95% confidence interval): $433.34

Key Takeaways:

• The projected price suggests a potential upward trend, though with significant volatility.

• If trends continue, the stock could appreciate considerably, but downside risks remain, as indicated by the lower bound.

• Investors should monitor market conditions, company financials, and external factors that could impact price movements.

Price Return Projection: 

• Expected Price: $289.24

• Lower Bound (5% confidence interval): $179.61

• Upper Bound (95% confidence interval): $433.34 

Monte Carlo Simulation (10,000 runs):

Monte Carlo Simulation Results for 3/31/2025

Based on 10,000 simulations, the projected stock price is:

• Expected Price: $289.44

• Low Price (Minimum Projection): $107.14

• High Price (Maximum Projection): $823.70

  
  

Key Insights:

• The expected price suggests moderate growth, aligning with historical trends.

• There is significant volatility, with a potential downside risk to ~$107.

• The upper bound projection ($823.70) indicates the possibility of a substantial rally if favorable conditions persist.

• Risk management is key, as the wide range reflects market uncertainty.

Support and Resistance:

Based on the last available trading data, the calculated Pivot Point, Support (S1, S2, S3), and Resistance (R1, R2, R3) levels are:

• Pivot Point: $234.30

• Support Levels:

  • S1: $230.71

  • S2: $226.38

  • S3: $218.46

• Resistance Levels:

  • R1: $238.63

  • R2: $242.22

  • R3: $250.14

    
    

Key Insights:

• Breakout Above $238.63 (R1) could indicate bullish momentum with the next target at $242.22 (R2).

• Failure to Hold $230.71 (S1) could signal further downside toward $226.38 (S2).

• The pivot point ($234.30) is a key level to watch for potential trend direction.

Fibonacci Analysis: 

Fibonacci Retracement Levels

Based on the past six months' price data, the key Fibonacci retracement levels are:

• 0.0% (High): $250.00

• 23.6%: $223.33

• 38.2%: $206.83

• 50.0% (Midpoint): $193.50

• 61.8%: $180.17

• 78.6%: $161.18

• 100.0% (Low): $137.00

  
  

Key Takeaways

• If the stock retraces from recent highs, these levels can act as support.

• $193.50 (50.0% level) is a critical point, often seen as a potential reversal level.

• A breakout above $250.00 (0.0%) could indicate a strong bullish continuation.

• If the price falls below $137.00 (100.0%), it may indicate further downside risk.