Broadcom Stock Just Bounced After One of Its Sharpest Declines in a Decade. Is the Stock a Buy Now?

It's normal when the stock market goes down, but it can be scary when it happens quickly. Look no further than the past couple of weeks. The Trump Administration's tariff announcement and ongoing posturing with other countries has sent stocks tumbling to some dramatic declines.

Broadcom (NASDAQ: AVGO) slid nearly 40% off its late-2024 highs, its sharpest decline in the past 10 years outside the time the market crashed at the onset of COVID-19 in early 2020. Now, the stock has bounced off its recent low. Should investors buy Broadcom now?

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Here is what you need to know.

Buying Broadcom's last dramatic decline worked out well

History has shown that when the stock market panics, it tends to be a good buying opportunity. The reason for panic tends to change, but investors are humans with emotions, and sometimes, the pendulum can swing too far in one direction. Tariff fears may have caused a panic this time, but it was COVID-19 back in 2020.

The stock market plummeted. Broadcom's stock price fell almost 50%. It's not fun buying stocks in these moments. Yet, those who held their nose and invested in the semiconductor and software giant made a lot of money. Broadcom has risen over 800% from March 2020 to today:

AVGO data by YCharts

It's important to remember that this isn't the case with every stock in a market downturn. A bear market can flush out low-quality companies and cause permanent losses for investors. Broadcom, an industry leader in semiconductors for networking and communications, is an excellent business and bounced back after the pandemic.

The company's growth outlook has improved with AI

Broadcom has thrived over the past decade, primarily due to growth in its core semiconductor business, which specializes in chips for networking and other communications applications. It then diversified its business with acquisitions, establishing infrastructure solutions as about 40% of its business. This segment sells products and services like cybersecurity, software for enterprise mainframes, and private cloud computing.

The arrival of artificial intelligence (AI) has ignited growth in the semiconductor industry. AI models require immense computing power to train and function. Broadcom is carving out its share of this market. It is developing custom accelerator chips (XPUs) for several large companies investing in building AI infrastructure, known as AI hyperscalers.

Management estimates that deals with three hyperscalers alone will represent a $60 billion to $90 billion revenue opportunity in 2027. Broadcom's AI-related chip revenue was $12.2 billion in 2024, so realizing anywhere near that opportunity will drive significant growth over the next several years. Analysts estimate the company will grow earnings by an average of nearly 21% annually over the next three to five years.

Should you buy the stock? Why Broadcom may struggle to replicate history

Broadcom's strong growth outlook and recent decline would seemingly signal investors to buy, but not so fast.

Remember how I said the pendulum can swing too far? Well, it happened again, but in the other direction. The market has rallied hard on AI enthusiasm for the past two years. As stock valuations rise, prices start reflecting more future growth. Broadcom's price-to-earnings (P/E) ratio has increased from 32 in March 2020 to 86 today. The stock price increased over 800%, but earnings did not.

At a PEG ratio of 4, Broadcom's price is too high, even for a business growing earnings by 21% annually. I typically buy high-quality stocks at PEG ratios up to 2 to 2.5. As you go higher, the risks increase that things will go wrong. Perhaps Broadcom won't grow as fast as hoped, or the market and stock valuations will broadly decline.

Broadcom is still an excellent business, but overpaying for stocks, even great companies, usually backfires more often than it works out.

Should you invest $1,000 in Broadcom right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.