Broadcom Trades at 71 Times Earnings and 27 Times Next Year's. History Says Which Side Gives.

Broadcom (NASDAQ: AVGO) costs about 71 times the profits it reported over the past year. The same stock costs about 27 times the profits analysts expect over the next one. Both numbers describe the same share price of about $428 as of this writing, and the difference sits entirely in the earnings.

A spread that wide can only resolve two ways. Reported earnings rise to meet the price, or the price falls to meet the earnings. Which side gives?

Broadcom's own history has an answer, I'd argue, because the company has run this exact setup twice in the past five years. Both times, the earnings did the closing.

Image source: The Motley Fool.

The gap, in dollars

With trailing-12-month earnings per share of about $6, today's price puts the price-to-earnings ratio near 71. Analysts' consensus forecast calls for roughly $15.75 in earnings per share over the coming year, more than two and a half times what the company just earned. Against that figure, today's price is the 27.

The cheap-looking 27 exists only if profits keep surging.

So far, they are. In the fiscal second quarter of 2026 (the period ended May 3), Broadcom's net income rose 88% year over year to $9.3 billion, on revenue that climbed 48% to $22.2 billion. And free cash flow also rose 60% to $10.3 billion. Across the trailing 12 months, net income has more than doubled. The earnings side of the gap is closing in real time.

There's a structural reason trailing earnings run low. Broadcom is a serial acquirer (VMware, its biggest deal, closed in late 2023), and deal accounting suppresses reported profits for years after each close as the company amortizes what it bought. Those charges fade on a schedule.

The fiscal second quarter shows the fade in progress: the quarter's $9.3 billion of reported net income sits within about 25% of the $12.1 billion non-GAAP (adjusted) figure, and the two used to sit much further apart. Analyst forecasts generally lean on adjusted earnings, which exclude most of those charges. So part of today's gap is definitional, and it narrows on its own as the amortization runs off.

History favors the earnings side

At the end of fiscal 2024, a year after the VMware deal closed, Broadcom's multiple reached 137 while its forward multiple sat near 29 -- a wider version of today's gap.

What happened next wasn't a crash. Reported net income more than doubled, the multiple fell to today's 71, and the company's market value rose from about $790 billion to about $2 trillion along the way. The earnings closed the gap while the price kept climbing.

The earlier episode ran the same direction. At the end of fiscal 2021, with amortization from the CA Technologies and Symantec deals still weighing on reported profits, the multiple sat near 35 against a forward multiple near 17. A year later the multiple was down to about 18.

Earnings had surged, while the market value slipped about 10%. The price helped a little that time. Most of the closing still came from the earnings.

Already in the price

Sure, the sample is small, and the earlier gaps were largely an accounting artifact working itself out. Today's version is partly that, with VMware amortization still rolling off, and partly a growth bet. Broadcom's guidance calls for about $29.4 billion of revenue in the fiscal third quarter, up 84% year over year, and analysts' forward estimates assume that ramp continues.

If it lands, this gap closes the way the last two did.

But the forward multiple already prices in earnings rising to roughly $15.75 per share. If profits hit that forecast exactly and the stock simply holds today's price, the result is a $2 trillion company trading at 27 times earnings, with the surge already spent.

History repeating is what maintains this price, not what rewards it. And if the ramp slips, this becomes the first of Broadcom's wide gaps where the price side has real closing to do.

I believe the gap resolves the way it always has at Broadcom -- through the income statement. The business is executing too well to expect otherwise. But at 27 times a forecast that already more than doubles the earnings, that outcome is the market's base case.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.