Broadcom (NASDAQ:AVGO) Rockets on $4.4B AI Revenue, 67% Margins and $1,960 Valuation

Broadcom (NASDAQ:AVGO) Accelerates AI Revenue and Margins with Custom Chip Momentum

AI Revenue Surges Past $4.4B as Hyperscalers Ramp Custom Chips

Broadcom (NASDAQ:AVGO) is experiencing a sharp acceleration in AI-driven growth, with Q2 FY25 AI revenue surging 46% YoY to $4.4 billion. This momentum is backed by demand from three core hyperscaler customers deploying Broadcom’s custom AI accelerators and networking silicon. Notably, AI networking revenue jumped 70% YoY, now making up 40% of total AI-related sales. This segment exceeded management expectations due to scale-up switch deployments with high port densities. Broadcom’s Tomahawk 6, capable of 102.4 Tbps, enables more compact tiered cluster designs, driving new system architectures in hyperscale training workloads.

Broadcom Targets $90B AI SAM by FY27 With XPU and Inference Expansion

Management reaffirmed its projected AI Serviceable Addressable Market (SAM) of $60B–$90B by FY27, bolstered by expected deployments of over 1 million custom accelerator clusters from three leading hyperscalers. The next leg of demand will be driven by AI inference—not just training—accelerating Broadcom’s custom chip (XPU) rollouts into 2026. In Q3 FY25, the company projects $5.1 billion in AI revenue, up 60% YoY, with 2026 expected to see continued strength. Morningstar estimates $50 billion in AI revenue by FY27, which would constitute 57% of total sales. HSBC forecasts ASIC capex rising from 2% to 14% by FY27, with Broadcom’s ASIC revenue reaching $42.8B by then.

Revenue Expands 20% YoY as VMware Integration Diversifies Base

Q2 FY25 revenue hit $15 billion, up 20.2% YoY, with all of the growth coming organically. Semiconductor revenue increased 17% YoY to $8.4 billion, led by the AI segment. Non-AI semiconductor revenue was -5% YoY at $4 billion, but CEO Hock Tan expects stabilization. Infrastructure software revenue surged 25% YoY to $6.6 billion, driven by the successful VMware Cloud Foundation (VCF) software transition. Q3 guidance calls for $15.8 billion in revenue (+21% YoY), and $16.98 billion in Q4. Broadcom’s FY29 revenue is projected to reach $127.34 billion, implying a 19.8% CAGR from FY24 levels.

EBITDA Margin Hits 67% as Cost Cutting Doubles VMware Efficiency

Following the VMware acquisition, Broadcom reduced operating expenses by cutting VMware’s quarterly spending from $2.4B to $1.2B. This helped deliver $10 billion in adjusted EBITDA for Q2, with 67% margin, a 7-point YoY improvement. Free cash flow hit $6.4 billion (+44.1% YoY) with a 42.7% FCF margin. AVGO paid $2.8B in dividends, repurchased $4.2B in stock, and retired $1.6B in debt post-quarter.

Valuation Still Rich, But EPS Growth Outpaces Nvidia

Broadcom trades at a forward P/S of 20.6 and a forward P/E of 41.6, above Nvidia’s 19.5 and 37.1, respectively. While high, AVGO’s earnings growth is stronger. Adjusted EPS is expected to climb from $4.87 in FY24 to $15.44 in FY29 (26% CAGR), compared to Nvidia’s $2.99 to $7.31 (19.6% CAGR). Despite the premium, institutional analysts argue the premium is warranted given Broadcom’s diversified mix of hardware, software, and long-term AI revenue streams.

Insider Transactions and Shareholder Return Remain Strong

Broadcom insiders remain active in maintaining ownership alignment. View insider transactions. The company has consistently raised its dividend, currently yielding 0.9%, with continued strong buybacks.

Risks: High Leverage and Regulatory Barriers to Acquisitions

AVGO carries $67.8B in debt against $7.9B in cash. While robust cash flows and past debt management mitigate concern, future rate hikes or slowing macro growth could compress margins. Additionally, Broadcom’s acquisition model faces mounting regulatory scrutiny; further large-scale deals may face delays or rejection.

AVGO vs. Nvidia: Dominance in Inference and AI Packaging

Unlike Nvidia, whose GPUs dominate training, Broadcom is increasingly the go-to vendor for AI inference, driven by easier-to-customize silicon and cost-effective packaging. The company’s deep collaboration with Google on Ironwood TPUs and chiplet packaging aligns it with hyperscalers reducing reliance on Nvidia. Broadcom is positioned to win a significant share of the next 500K–1M chip deployments—a segment historically led by Nvidia.

AVGO Is a Strong Buy With 14% Upside and Expanding Moat

Despite trading near $1,720, Broadcom’s DCF-based intrinsic value sits near $1,960, implying 14% upside. With a growing AI footprint, expanding EBITDA margin, and integrated VMware business model, NASDAQ:AVGO stands as a Strong Buy. The stock offers a balanced exposure to hardware and enterprise cloud, with deep AI hyperscaler penetration and sustained long-term tailwinds.

That's TradingNEWS