Should You Buy Broadcom Stock While It's Under $400?

In early June, shares of custom chipmaker Broadcom (NASDAQ: AVGO) were near their high of around $500, ahead of the company's latest earnings report. But despite posting strong numbers and solid growth, the stock fell sharply afterward and hasn't recovered since.

Is the tech stock a good buy while it's trading below $400?

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Why has the market turned bearish on Broadcom?

Broadcom has been a top growth stock for years, and in five years, it's up around 700%. This year, its gains are around 10%, which appears modest given not only its impressive growth but also its strong potential due to artificial intelligence (AI).

In the company's most recent quarter, which ended May 3, its semiconductor revenue from AI surged 143% to $10.8 billion. And for the current quarter, growth is expected to be even more robust, with CEO Hock Tan expecting the company's AI-related semiconductor revenue to rise by 200% to $16 billion.

While Broadcom's overall growth rate of 48% for the entire business was strong, the problem may simply stem from the impressive gains the stock has generated over the years. At $1.8 trillion, Broadcom is among the most valuable companies in the world, and high expectations are priced into its valuation. Its price-to-earnings (P/E) ratio of 64 is fairly high, and that may be a big reason why investors are a bit cautious with the stock these days.

Broadcom could be a cheap buy for long-term investors

Now that Broadcom is trading lower, there may be a more compelling case for buying it. It's been a trusted partner of many hyperscalers, and as long as spending on AI isn't slowing down, Broadcom's growth may remain high, and its stock may have more room to rise higher.

While its P/E ratio may seem excessive, the stock is trading at a forward P/E (based on analyst estimates of future earnings) of just 20. That's lower than the S&P 500 average of 21. For a top growth stock that's been outperforming the market for years, Broadcom may be a bit of a cheap buy when looking at the long run.

There is some risk with Broadcom because its business depends heavily on hyperscalers, but given the long-term opportunities in AI and companies seeking more reasonably priced chips, Broadcom may be well positioned to benefit. While there may be short-term volatility, Broadcom could be a good long-term investment for investors to consider today.

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.