Broadcom (AVGO): Big Tech’s Quiet Heavyweight Faces Risky Stretched Multiples

For those of my boomer generation, professional wrestler Andre the Giant was known as the “eighth wonder of the world.” I consider Broadcom (AVGO) to be akin to that, the 8th stock in the Magnificent 7. Here it is, ahead of Tesla (TSLA), in 7th place by weight within the S&P 500 ETF (SPY).

Weight of each S&P 500 component. Source: Barchart

Broadcom’s own tagline is “connecting everything” as evidenced here.

Broadcom’s product portfolio. Source: Broadcom IR

This is perhaps the least well-known among the top S&P 500 holdings, since it does not have the customer-facing presence of the others, and thus lacks their iconic brand recognition. “Just Broadcom it” does not roll off the tongue.

AVGO presents to me as a stock that is very much a metaphor for the stock market’s current environment. The business is rolling, the stock appears to have plenty of support from Wall Street, and continues to be a very buzz-worthy story. As tracked by FX Empire, more than 75% of news articles have been positive over the past month.

Broadcom sentimental news coverage. Source: FX Empire

A very broad valuation level

Yet at 55x trailing earnings and more than 22x trailing sales (did I really just write that last figure, and is it accurate – yes), AVGO is the opposite of cheap. Some stocks can “grow into” their valuation, but that happening here is a stretch. Still, unless and until the market cares, riding the wave can still be profitable.

And, with earnings season coming up, AVGO has a big advantage over most S&P 500 stocks. It reports at a different time of the quarterly cycle than other big tech companies. Its next report is not until September 3. So, barring a pre-announcement, that standard risk is off the table for a trader’s time frame.

Chart take: high and tight

For those not familiar, that’s a reference to a pitch to a batter in the Major League All-Star game, the annual event held this past Tuesday. The high part is easy to see, as AVGO has doubled in a short time frame. And “tight” because as the old Wall Street expression goes, trees don’t grow in the sky.

Broadcom 1-year price action. Source: Barchart

But until there’s a severe sign of distress in the chart, it’s hard to bet against it. There’s a difference between a stock that is way up and showing signs of weakness, and what I see here. That PPO indicator at the bottom is still flat enough to convey to me that the stock is elevated but not breaking down for now. AVGO just hit another new high this week.

So, barring a lightning bolt type of event, AVGO could slip back by 5% or so, and still be in an uptrend for trading purposes. But in this business, you always look both ways before crossing the street, so to speak. Not all investors agree with this, but I do: a stock that has doubled in such a short time is automatically more risky because of that.

ROAR Score for AVGO: 45

This produces a ROAR Score of 45. That means I estimate that there’s a 45% chance of the next 10% move in AVGO will be up, and 55% probability it will be down. Nothing is an exact science on Wall Street, but this rating system helps us distinguish between a stock that is way up and in clear danger from one like AVGO which is not yet showing a high risk signal.

Broadcom ROAR Score. Source: Sungarden Investment Publishing (Rob Isbitts)

This is really a sentiment game at this point. Not only for this stock but for much of the Mag-7 as well. The market can’t say no to these giants. And while I’ll spare you the Pro Wrestling history, even the great Andre the Giant did not retire undefeated.