Down More Than 20% From Its High, Is Broadcom Stock a Buy?

When a stock dips in value, it can be a good opportunity to buy it at a reduced price. But that's only if you expect it to bounce back. In many cases, it can be the start of a prolonged decline. That's why it's always important to consider the context and to understand why a stock is down. That can save you a lot of stress later on.

Broadcom (NASDAQ: AVGO) shares have been falling recently. They are down more than 7% in the past month, which may not seem significant, but they have also fallen more than 20% from highs of nearly $500. Why is the tech giant struggling, and could now be a good time to buy it?

Image source: Getty Images.

The stock has been down since reporting earnings

On June 3, Broadcom posted its latest earnings numbers, and while they were good, they may simply not have been strong enough to inspire investors to buy the already expensive stock. The company's revenue for the quarter ending May 3 rose 48% to more than $22 billion. Broadcom has been experiencing growth in artificial intelligence (AI), noting that AI semiconductor revenue was particularly strong, up 143%.

However, when the bar is set high, as it is with highly valued stocks, it can be difficult to make the case that the stock is a buy, even on strong earnings numbers. That's because if you're paying a significant premium for a stock to begin with, then that effectively prices in a lot of future growth. Broadcom, whose valuation topped $2 trillion before the sell-off, remains one of the top tech stocks in the world, with a market cap of around $1.8 trillion. Its inflated valuation has likely been a key reason for its recent decline.

Has Broadcom become a cheap buy?

Due to the recent decline in Broadcom shares, the stock now trades at 66 times trailing earnings, which is a steep drop from the three-digit multiple it traded at last year. It's cheaper, but it's still not exactly a discounted stock.

If, however, you're investing for the long haul, a stronger case can be made for Broadcom. That's because the stock's price-to-earnings-growth (PEG) multiple is 0.72, which suggests that, based on analyst projections for its growth over the next five years, it's a good buy. When the PEG is less than 1.0, it indicates a stock has plenty of value when its future growth is taken into account.

The risk, however, is that this relies on assumptions of future growth. In tech, the picture can change rapidly, but if you're bullish on the opportunities in AI, the tech stock may be worth buying at its current valuation.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.