Speaker is not buying AVGO currently due to opportunity cost, despite acknowledging its strong AI-driven fundamental growth.

So, who is behind all of these chips? Well, it's Broadcom, ticker symbol AVGO. Broadcom stock has seen its stock surge in recent years up 637% over the past 5 years, and it's now the eighth most valuable company in the world with a market cap of $1.75 trillion.

They just reported earnings and business is booming. Revenue is up 86% year over year, earnings per share is up 96% year over year, AI semiconductor revenue is up 221% year over year.

They hit record free cash flow and they raised their guidance.

And I actually have a little bit of a history with Broadcom stock and it's arguably one of my bigger mistakes. I had invested in Broadcom stock back in early 2023 and sold in mid-2024, right after I saw this big jump.

So, I went back and gathered all of my data around buying and selling Broadcom stock and what it would be worth today. Now, it was a little complicated cuz they had a stock split along the way, but split adjusted, I had bought Broadcom at $58 a share and I sold at $168.

So, I had a 189% gain in 16 months. I nearly three-exed my money. That felt like a big win, and it was a big win, but I made a mistake.

When I had bought Broadcom stock back in 2023, there was not even a consideration in my mind about them being an AI-related company. Their AI semiconductor business was practically nonexistent and a very small percentage of the company.

The only thing they had was the Google TPU, and it wasn't clear that that was going to go on a massive ramp up yet.

When I bought Broadcom, it was a completely different kind of company. My thesis was entirely different. It was a value stock, a dividend growth stock. The company was trading at 20 times earnings, and that was earnings back then.

I was buying it at a 3% dividend yield for a company that had been rapidly growing its dividend payment.

There was a long period of time where dividend investors loved Broadcom stock cuz it had a high yield and high dividend growth, a very rare combination. Over the past 10 years, their dividend's up 1,200%. That's a 29.24% compound annual growth rate.

But by the time we got to June 2024, the story was starting to change. Broadcom was now trading at a very high multiple, and it did not yet have the earnings and cash flow growth to back it up.

This was because the market was anticipating the growth of their XPU, their AI semiconductor business.

But frankly, at the time, I didn't know how this would work out for Broadcom. It was not a part of my initial investment case at all, and in early 2024, it wasn't even clear the scale that the spend towards the AI data center build up would ramp up to, or the fact that we'd still be growing rapidly in 2026 and still have expectations of high growth in the years to come.

So, I took my quick 2.9x on Broadcom stock. So, I have continued compounding that money from my gains in Broadcom, but the smartest move probably would have just been to continue holding.

If I had never sold my Broadcom position, it'd be worth $41,500 today. I left $22,000 on the table. That'd would be 6.3x on my initial investment, and I would have a 4.5% dividend yield on my cost basis.

Now, I'm not going to beat myself up about it because the thesis on the ground completely changed around Broadcom stock. The business I bought no longer even existed. Today, Broadcom is primarily an AI semiconductor company.

That's where the entire valuation for the stock comes from, and you can see how massively this has ramped up. AI semiconductor revenue has now become Broadcom's largest business segment, and it's the fastest growing by far.

So, today I'm going to give you an updated look at Broadcom stock after earnings. And if you own Broadcom stock, I'm going to explain why it might be a mistake right now to sell like I did, even if you're sitting on big gains, because the fundamental story at Broadcom is looking quite good right now, and there is room for continued growth in the years to come.

Now, of course, I will take a look at the valuation of the company as well, and I'll answer the question of whether or not I'm interested in adding Broadcom stock again in the future.

All right, so Broadcom, let's dive into it. Now, I'll start with a big picture look at the stock and the recent earnings report, but also explain what Broadcom is as a business.

Give you a little bit of history and perspective around the company. That way you can properly analyze how to think about Broadcom's role in this AI buildout.

So, in the long run, this has been a great performer in the stock market. All time, the stock price is up 22,569%, which is a 37.39% compound annual growth rate. The total return, so with dividends reinvested, is even better, 31,746% total return. That's a 40.15% CAGR.

And again, I mentioned this was a stock dividend investors loved. If you had the stock from when it went public and you reinvested all the dividends, 9,177% of that is from reinvested dividends.

And now Broadcom is a $1.75 trillion company. I was buying the stock when it was a $200 billion company. So, what's the story with Broadcom? Well, if I'm being honest, the company is a little bit of a mess, and you can kind of think of it more as a private equity financial asset.

The company has been run by Hock Tan, the president and CEO, and he comes from a private equity background. So, Broadcom has a largely grown through acquisitions.

A lot of the company's foundations comes from Avago. They IPO'd in 2009, and they have continued acquiring many companies along the way: LSI, Bell Labs from AT&T, Broadcom in 2016, and they ultimately took the Broadcom name, Brocade, CA Technologies, Symantec, and VMware in 2023.

And a lot of that was done through debt. These acquisitions were largely debt-funded. And if you go back and look at their history with their net debt, you can basically see it surge up every single time that they have an acquisition, and then they pay off that debt, and then they do another acquisition, and then they pay off that debt, they do another acquisition, they do another acquisition, they start to pay off the debt, they do another one, they start to pay off the debt, and then here you see this huge boom after the VMware acquisition.

In hindsight, that was a very expensive acquisition. And it's turned out pretty well, but it's not any of the real reason for Broadcom's latest growth. And I pointed this out when I initially sold Broadcom stock.

I was like, this company took on a lot of debt, they're not even a real AI company at the time. AI was a very small percentage of their business. However, they have since paid off a ton of that debt, not going to be a problem at all.

And in the old versions of these Broadcom presentations, I don't think they had the and innovation part to this slide. And that's because this whole AI trend and their XPU business that they had built out with Google and the TPUs, that has completely taken off.

And now they have a ton of different customers, and it is growing to the scale where it's going to dwarf all of the rest of Broadcom's business.

Because Broadcom still has a ton of other businesses completely unrelated. They have infrastructure software, includes cybersecurity, and enterprise software, mainframe software, private clouds, and a lot of that comes from that VMware acquisition.

That grew their software side of business massively. And their semiconductor business, the AI XPU, that's the fast-growing part of the business. But they have a lot of other slower growth parts of the business, broadband, industrial, networking, that's more traditional ethernet networking, server and storage, and wireless.

And for a large chunk of the past 2 years, those businesses haven't been growing that much.

But it doesn't matter because the entire investment case around Broadcom, why it trades at the valuation it currently trades at, it has to do with the AI revenue. As I mentioned, it's grown into their largest business segment, and it's the fastest growing by far.

It will dwarf all of the rest of Broadcom's business.

They just guided to $58 billion of revenue for the full year 2026. They gave outlook of revenue of $115 billion for fiscal year 2027. And this next year outlook is similar to how Nvidia gave their next year outlook in their latest earnings report.

And they did it based on the supply they have secured.

And Hock Tan is a smart guy, he knows business. He used the same exact line that Jensen said, which is that they have far more AI demand than they have in supply. So they're giving outlook based on their supply they have secured.

And he made sure to emphasize, if they could secure more supply, they could sell more.

Hock Tan even went farther on the earnings call giving a targeted outlook of $230 billion in fiscal year 2028. This is for their AI revenue.

So Broadcom's financials, they're getting pretty impressive and they're on a continued path to high growth. Let's get a look at it. So they just reported earnings per share. It came in at $3.32 for the quarter, which was up 3.1% from analyst expectations.

So they posted a beat. And that quarter was up 96.45% year-over-year. This is the all-time high in earnings per share at Broadcom by far, and you can see the rapid pace of growth they're on.

Earnings over the trailing 12 months is $9.76. That's up 55% year-over-year. And here you can see the analyst expectations for continued high earnings per share growth in the coming years.

Overall, they had $29.59 billion of revenue in the quarter, up 85% year-over-year. And again, all-time high in revenue for a quarter. And then again, you should expect this to continue growing because now their largest part of their business is their fastest growing. It's a great combo to focus on.

Broadcom has pretty good margins, too. 67% gross margins, 36% net margins.

And one of the things I always loved about Broadcom's business, and it's also one of the things that I love about Nvidia's business, but I started to learn about it when I was first analyzing Broadcom.

And that's the fabulous semiconductor business model. Both Broadcom and Nvidia, they don't manufacture the chips themselves. They are designers. They design the technology, they get manufactured at partners like TSMC.

So, that means that these are capex-light businesses where they're not building out these chip fabrication plants. So, they generate a ton of free cash flow.

You can see over the trailing 12 months, $40.65 billion of operating cash flow, about a billion dollars of capital expenditures. So, almost all of it flows through to free cash flow.

$39.4 billion over the trailing 12 months, up 58% year-over-year. And in the latest quarter, they did $13.67 billion of free cash flow. That's up 94.5% year-over-year. And you can see the rapid long-term growth happening at Broadcom right now.

It's at its all-time high by a wide margin. And over the next couple years, we're going to be hitting all-time high after all-time high after all-time high.

So, if you're an investor in Broadcom, you should expect increased shareholder returns either through share repurchases and their growing dividend. Now, interestingly, in the past 3 years, dividend growth has slowed down a little bit for them, only growing at 12.2% CAGR.

The most recent dividend increase was only 10%, and you would have to think that Broadcom will be in a position to grow that dividend much higher in the future. But to be fair, it did take some time for that AI semiconductor business to grow into a larger percentage of the company and drive the overall growth of Broadcom.

Part of the reason why I sold in a year and a half is because I was looking at Broadcom's free cash flow and I saw the stock price go up 3x while overall free cash flow of the business went up like 10% max and it really didn't increase until the year after.

It took time for the AI semiconductor business to grow into a meaningful enough part of Broadcom's business to drive their overall business.

So, Broadcom's dividend payout ratio doesn't even look that great, but this is based on last fiscal year. A 41% free cash flow payout ratio and a 48% earnings payout ratio. Now, I would expect this to get way more sustainable.

I'd also expect them to continue paying off debt which they've been doing. Their net debt has been improving and overall Broadcom as a business is doing fantastic and they are on a path to continued high growth.

That said, I will give you my thoughts on the current valuation of Broadcom stock and what kind of returns you can expect going forward. And ultimately, I'll share my thoughts on whether I'll add Broadcom stock again in the future and what I'm actually choosing to do with my money instead.

But first, let's cover some more big picture stuff from that earnings call and what's really driving the growth at Broadcom. So, as you can see, the AI revenue is set to continue growing in the coming years, doubling in fact.

But for context, Broadcom's AI business is still smaller than Nvidia's by a lot. Nvidia's data center business did $89 billion of revenue at higher margins. That was just in one quarter, the latest quarter.

For context, Broadcom is guiding to $58 billion for the full year 2026.

Now, to be fair, Broadcom's business is growing faster, but from a smaller base.

So, what is Broadcom's selling point in this equation? Their selling point is the idea that you have a custom chip for you.

And Broadcom gave some signals of what Anthropic's saying they will need in TPUs. 5 gigawatts in 2027 and 10 gigawatts in 2028.

So is Broadcom an Nvidia killer? No, it's not. But they're both benefiting from the same AI buildout. The compute is needed and customers do want to reduce dependence on Nvidia.

So there will be a lot of other chips that come up, especially specialized for various use cases.

But the reality on the ground is that the pie is growing. So all of these companies are going to keep growing in the short run.

The demand for AI compute is growing year after year. So is Broadcom stock a good buy today? Let's take a look at the valuation. I'll give my thoughts of what you can expect going forward.

Let's also take a look at some of the latest Wall Street price targets. We'll see if any have posted after their earnings reports.

And then I'll explain why I'm not actually buying Broadcom stock right now. So let's take a look at Broadcom's PE ratio. It currently sits at 46.9, which historically is on the high end.

As I mentioned earlier, I was buying this in the 20 PEs back in 2023 and they've had a ton of earnings growth since then. But there was a period of time where the stock price was well ahead of the earnings growth and Broadcom stock was in the hundreds of a PE ratio.

But their EPS growth has now caught up to that. So if we look really since the AI buildout started over the past 3 years, you can see the daily PE ratio that the stock is traded at, including that period of higher multiple.

And if we look at based on this, the PE ratio has been coming down for Broadcom stock. The earnings are starting to outpace the price growth.

And in the long run, it's the fundamentals of the business which will drive the returns. So yes, 46% is a high multiple, but if they grow earnings per share 50, 60, 70% for multiple years in a row, that starts to look cheap.

And that's the mental calculus you're playing with some of these growth stocks. It all comes down to growth. So, if earnings per share keeps booming, then on today's stock price, it will look cheap by comparison.

As an example, the current estimate among analysts is $26.38 in 2028 earnings per share. And on today's stock price, that's a 13.9 P ratio.

If we look at the Value Graph tool here on divindata.com, and we're looking at earnings per share. So, you can see over the past 5 years, the median adjusted earnings per share over the trailing 12 months, the P ratio has been 29.59.

So, based on that multiple, the stock does look overvalued. But again, this is including a period where the business was just completely different. So, you really can't be looking at that multiple in the pre-AI semiconductor revenue period.

If we look over the past 3 years where that started ramping up, the median multiple is 41.47. The current TTM P ratio is 37.63. So, we're right around fair value if we look over 3 years.

However, the past year, the P ratio has been coming down, earnings have been improving. So, Broadcom stock, it's actually looking cheaper.

So, over the past year, this is actually one of the cheaper valuations you could have bought Broadcom stock at. And that's despite the stock price being up 21%. The growth has been out pacing the stock price.

And this is a similar trend I identified at Nvidia. The growth is out pacing the stock price appreciation for the past year and a half or so.

So, what would the returns look like for Broadcom stock assuming they hit these earnings estimates in the coming years? Well, that partly has to do with what multiple they trade at at that time.

So, if we take that forward-looking P ratio of 31.7, and we assume that's what the stock will trade at going forward, which you could make the case that's too expensive or too cheap.

It all depends on what you think the long-term growth and demand for the AI build-out will end up being.

But if we assume this 31.7 P by 2030, if we take that $35 estimate in earnings per share, Can we apply a 31.7 multiple to that? That gives you a projected price of $1,109, which would mean Broadcom stock would have a 202% upside from here, which would be 30.4% growth annualized. That's a pretty good return.

And even if the company starts trading at a lower multiple like 20 back when it was in 2023 and growing way slower. Now, personally, I don't think that makes much sense, but anything could happen in the market.

Re-ratings happen due to the actual fundamental growth in earnings. That would give a 2030 price of $700, which is still 90% upside from here. That's 16.8% growth annualized.

But again, this all stems on Broadcom continuing to grow and hitting new all-time highs. I wanted to give some of the latest analyst price targets, but our data hasn't loaded in.

They just reported earnings as I record this video. But I'm sure in the coming days you'll be able to see new 12-month price targets come out.

But that gets us to the big reveal. Am I buying Broadcom stock? Well, I definitely am getting more and more interested, but frankly, I'm not buying Broadcom stock because of this line of logic. It all comes down to opportunity cost.

Broadcom has tons of legacy businesses and debt from those acquisitions. Even though I think Hock Tan is an awesome CEO in his own right, Google TPUs are going to crush it. OpenAI's new chip is probably going to crush it and reach a large scale in the coming years.

Meta's new chip, probably going to do well. So, Broadcom is going to be in a very strong position. And when we look to three years from now, they're going to be making a ton more cash than they do today.