Broadcom Inc (AVGO, Financial) is a semiconductor giant, making the chips and infrastructure that power the most advanced computing systems in the world. Broadcom's technology is everywhere, whether it's the hyperscalers such as Amazon (AMZN, Financial) and Alphabet (GOOG, Financial) training large AI models or enterprises integrating AI-driven applications.
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But the more interesting thing is that the company just delivered another blowout quarter, with revenue exploding and AI-related sales skyrocketing. It's also very profitable, with a very high expected adjusted EBITDA margin, which is rare in semiconductors.
Despite a premium valuation, Broadcom's future still looks bright with strong cash flow and noteworthy partnerships. Also, as the stock has dropped 16% YTD, this dip might be a buying opportunity before the next leg up and the stock could continue to surprise investors.
The question is, how high can Broadcom go? Let's dive in to find out.
Broadcom beats estimates with strong revenue and FCF momentum
Broadcom crushed estimates in its first quarter of fiscal 2025. The AI hardware leader beat on earnings-per-share (EPS) of $1.60 by 9 cents and significantly surpassed revenue expectations of $14.92 billion, $330 million ahead of estimates.
The 25% year-over-year (YOY) revenue growth of the company is a result of continued heavy investment by data centers and hyperscalers upgrading their AI infrastructure. Infrastructure software revenue clocked in at 47% and Broadcom's semiconductor solutions revenue grew 11% year over year on broad-based demand across its portfolio.
Now, let's talk a bit about AI spending, which is only accelerating, placing Broadcom to ride a long-term tailwind. Tech giants like Amazon, Alphabet, Meta Platforms (META, Financial), and Apple (AAPL, Financial) are shelling out in order to stay at the forefront of the AI race, and Broadcom is benefiting from their activities. The company's Q1 AI-related revenue increased 77% compared to the previous year to $4.1 billion, which is clear evidence of the growing demand for its AI-optimized chips and connectivity solutions.
And this is only the beginning. The data center and AI-related hardware and software market are seen as expanding at a ridiculous 40-55% annually toward $1.4 trillion by 2027. As more and more industries increasingly adopt AI usage in their business processes, the demand for AI infrastructure will quickly increase and Broadcom is well set to take a large portion of it.
Strong free cash flow momentum: Beyond top-line growth, Broadcom's free cash flow (FCF) increased even faster than revenue, which is evidence of strong cash generation and operational efficiency by Broadcom. The company generated a FCF of $6.0 billion, up 28% YOY. This figure outpaced revenue growth by three percentage points. It also meant a 40% FCF margin, up 1 percentage point quarter-over-quarter and validating Broadcom's ability to reinvest in growth, pay down debt and return capital to shareholders.
Since Broadcom is executing flawlessly and AI demand is growing rapidly, the company should continue to deliver brilliant results in the quarters ahead.
Outlook for another strong quarter
Q2 FY25 looks just as strong as well. Revenue is expected to come in around $14.9 billion, which is a strong 19% YOY increase, a symbol that the demand for its products is not slowing down anytime soon.
And with no surprise, the biggest driver is AI. Broadcom's AI semiconductor revenue alone is expected to be around $4.4 billion in the quarter due to hyperscalers spending on AI XPUs and connectivity solutions. This is a huge tailwind, and it resonates with the importance of Broadcom's tech in driving the AI revolution.
Finally, their profitability with an expected 66% adjusted EBITDA margin is more impressive. That's rare in semis, but such a mix of high-value AI chips and infrastructure software of Broadcom maintains fat margins.
Broadcom's bold investments and key partnerships
Broadcom is pushing the semiconductor innovation boundaries as hyperscalers step it up on AI investments. Its tech has become extremely essential, and the company's Q2 expectations in AI semiconductor revenue are a testament to that.
The company is pouring resources into R&D to keep ahead, putting focus on cutting-edge AI XPUs and networking. It is developing a 10,000 teraflops XPU with 2nm 3.5D packaging and scaling AI clusters to 1 million XPUs on Ethernet. On the networking side, it has doubled RAID capacity and is prepping 1.6T bandwidth switches for sampling. These advancements in AI will be game-changers in the AI accelerator industry.
Strategically, Broadcom is winning big. Just recently, two more hyperscalers tapped Broadcom for AI XPUs in order to draw on its stature as a key enabler of AI infrastructure. Now the company is making Alphabet's Tensor Processing Units (TPUs), Microsoft's (MSFT, Financial) Maia, Amazon's Trainium and Inferentia, Meta Platforms' MTIA, and ByteDance's AI ASIC chips, essentially providing the custom silicon for the biggest names in AI. Broadcom's balanced model of high-margin software and AI-driven hardware is shown by this deep integration across most of the major cloud and AI players and the VMware-driven enterprise software growth. If Broadcom continues at this speed, the company might cement itself as one of the most powerful forces in AI infrastructure.
Solid growth outlook supports valuation
Broadcom has done an excellent job of maintaining an earnings consistency track record, having either met or beaten EPS estimates in every quarter over the past few years. Such outperformance speaks to the company's business model's enduring power as well as the ability to drive continued growth.
Investors have taken notice as Broadcom's stock price has surged 53% over the past year and a whopping 931% over the past half-decade. This performance is not simply luck but instead reflects the company's strategic positioning in AI-driven semiconductors and enterprise software.
Source: Broadcom's Earnings Summary (Seeking Alpha)
Looking ahead, Broadcom is set to post robust earnings and revenue growth. The EPS for FY2025 and FY2026 are projected to increase substantially YOY, at $6.62 and $7.86 respectively. Nonetheless, seeing how Broadcom has a track record of exceeding estimates, it can do the same in the future as well. If Broadcom delivers results in line or above the past quarters by the same margin of say 3-5%, then its EPS for FY2025 can touch $6.80-$6.95 and for FY2026 can cross $8.00. This means that the potential of this outperformance will make its valuation even more attractive.
Premium price? Not really: Broadcom's forward P/E at 28.7 may seem elevated at first glance compared to traditional value stocks. However, as stated above, premium valuations are justified if a company generates superior growth. Broadcom's earnings trajectory supports its multiple in its case.
A deeper look at Broadcom's Price-to-Earnings Growth (PEG) ratio provides further evidence that it is relatively cheap. The stock is trading at a PEG ratio of 1.31, based on a forward P/E of 28.7 times and a matching EPS growth rate. Broadcom's PEG indicates that the company is attractively priced in view of its strong earnings trajectory and is notably 18.75% lower than the sector median of 1.67.
The bottom line is that despite the premium valuation of Broadcom, the stock is still relatively cheap when one takes into consideration its growth rate.
Broadcom's future from here
With a solid track record of consistent estimate beats and strong EPS and revenue growth, Broadcom has a lot of room to run. In FY2025, EPS is forecasted to be $6.62, rising to $7.86 in FY2026 and higher. This implies a short-term price target of about $205 to $210 (based on FY2025 estimates) given this company's forward P/E of approximately 28.7 times.
In the long-term, EPS is expected to rise to $9.12 in FY2027 and $12.74 in FY2028. If it happens, a conservative P/E multiple of about 21 times implies the stock should trade near $280-$290 in 3-4 years.
Source: Broadcom's Earnings Estimates (Seeking Alpha)
Bullish case scenario: If Broadcom exceeds estimates, due to AI demand, networking expansion, and software growth, EPS would grow faster than expected. If EPS reaches $7.00 in FY2025 and $8.25 in FY2026, and the market rewards Broadcom with a higher multiple of 32 times P/E, the stock could trade above $235 in the short-term.
And if EPS hits $10.50 by FY2027 and $14.00 by FY2028, a 23-25 times P/E multiple would take the stock to $350-$375 within the next few years in the long-term bullish case.
Source: Author Generated
Broadcom's insider selling and institutional interest
Broadcom insiders have been selling a notable amount of stock over the past year, which naturally piques some eyebrows. CEO Hock Tan sold $26 million worth of shares at $173 each, one of the biggest sales. It seems concerning, but as it was only 10% of his holdings, it's not necessarily a red flag.
In addition, insider selling dropped in the past three months and no insider sales occurred in the past month, perhaps implying that the company's executives hang on to their shares after Broadcom's latest earnings release.
Furthermore, Broadcom's 1.3% insider ownership worth $14 billion is still a good thing. It is not a huge stake, but it is a statement that executives and important decision-makers have an interest in the company's long-term success.
Institutional investors are stepping in:Although there have not been any insider buys recently, institutional investors are increasingly confident in Broadcom's long-term potential, even as insiders are cashing out. Institutional buying tends to outweigh insider selling, as these funds are taking a long-term, research-backed approach.
While some gurus are taking profits or rebalancing, trades demonstrate a steady accumulation trend, which implies that large funds see Broadcom as a stock they want to hold or add to at current levels.
One of the standout among them is Ken Fisher (Trades, Portfolio) (Trades, Portfolio) , the founder of Fisher Investments who currently has 23.9 million shares. Fisher uses tech stocks heavily in bull markets, as they are supposed to lead the rally. According to him, Broadcom is a key pillar of market strength, and his large stake in his firm reflects his confidence that the stock will continue to be this way.
Balancing debt repayment with growth potential:Broadcom's insider selling could be deemed a strategic move of offloading shares at premium valuations to repay debt. Broadcom took on a big bet on debt with its $69 billion VMware acquisition and has a cash-to-debt ratio of 0.14 which is very low, so it makes sense to lower leverage.
That said, the company has enough free cash flow to reinvest in innovation while improving its balance sheet. If Broadcom continues to grow at such a pace, the dilution from insider sales may be minimal and the company may be able to grow past any concerns, making these insider sales a natural part of its financial strategy, not a reason to worry.
Risks to my thesis
Broadcom's growth trajectory is still very compelling, but a few risks may counter its bullish outlook.
The biggest risk is Broadcom relying on Apple. Beginning with the iPhone 17 in 2H25, Apple's transition to in-house Wi-Fi chips could have a big impact on Broadcom's sales. This revenue stream may decline, provided Apple fully phases out Broadcom's chips over the next three years.
Another concern is valuation risk. If growth fails or doesn't merit these superior multiples, Broadcom might face downward pressure. Lastly, profitability concerns remain. While sales are growing, gross margin expansion must be sustained. Investors would shift out of Broadcom if it grows revenue but cannot keep the margin momentum.
Your takeaway
Broadcom is in a perfect situation to take advantage of the AI boom and enjoy solid top and bottom-line growth. The long-term risk from Apple's move toward in-house chips is a big one, but the stock's AI momentum is more than enough to make up for lost revenue. Valuation too continues to be a point of debate, but the history of beating estimates and AI demand surging make its premium multiple justified.
Insider selling might also make investors worry, which is justified and should be kept an eye on, but investors should not finalize their bet on a stock based on it. There are many other watch factors, for instance, maintaining profitability. Broadcom can stay ahead as long as it continues to expand margins with revenue growth. For now, the stock looks well positioned for long-term upside.
This article first appeared on GuruFocus.
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