Is Broadcom (AVGO) Still a Buy Despite Rising Valuation and Margin Concerns?

Broadcom (AVGO) has long been a poster child for the AI-driven semiconductor revolution, but its recent stock performance has sparked a critical question: Is the company still a buy despite its soaring valuation and margin pressures? Let's dissect the numbers, strategy, and competitive landscape to determine whether AVGO's current price tag justifies its future potential.

The Financials: A Tale of Two Sides

Broadcom's 2025 financial report paints a picture of a company riding a wave of growth. Its trailing P/E ratio of 71.55 and forward P/E of 33.84 suggest investors are paying a premium for its earnings, but this is offset by a 24% year-over-year revenue surge to $63.89 billion. The semiconductor solutions segment, which accounts for 58% of total revenue, grew by 22%, while the Infrastructure Software segment-now 43% of revenue-is expanding at double-digit rates.

However, the AI semiconductor boom has introduced cracks in the facade. While AI-related revenue hit $6.5 billion in Q4 2025 (a 74% YoY jump), this segment carries lower margins than traditional semiconductors. As a result, gross margins dipped slightly, contributing to a 17% stock sell-off after earnings. The company's operating margin of 39.42% and net margin of 36.20% remain impressive, but they now face the reality of a business model increasingly skewed toward lower-margin AI hardware.

Strategic Moves: R&D, Partnerships, and AI Dominance

Broadcom's strength lies in its ability to adapt. The company has secured a $11 billion AI chip order from Anthropic and a $100+ billion lifetime-value deal with OpenAI, cementing its role as a critical supplier for AI infrastructure. These contracts, coupled with a 17% R&D-to-revenue ratio, underscore its commitment to innovation in a sector where custom silicon is king.

The Infrastructure Software segment, powered by VMware's enterprise adoption, is another growth engine. This diversification is key: while non-AI semiconductor revenue has stagnated, the software segment's double-digit growth provides a buffer against sector-specific volatility. Analysts argue this hybrid model positions Broadcom to weather both AI and non-AI cycles.

Valuation Realism: Expensive or Justified?

Broadcom's valuation metrics are polarizing. At a forward P/E of 33.84 and a PEG ratio of 0.69, the stock appears undervalued relative to its projected 36% long-term EPS growth. However, its 30x 2027 earnings multiple feels steep in a market where investors are increasingly cautious about AI hype.

Comparisons to peers like Nvidia and TSMC add context. Nvidia trades at a forward P/E of under 24.5 and a PEG of 0.7, while TSMC's 24x forward P/E and 0.65 PEG suggest it's cheaper relative to growth. Yet Broadcom's AI-specific dominance-bolstered by its $73 billion AI-related backlog-gives it a unique edge. Morningstar's $480 fair value estimate reflects confidence in this edge, even as the stock trades at 17x forward sales.

The Verdict: Buy, But With Caution

Broadcom's valuation is undeniably rich, but its strategic positioning in AI and software offsets this risk. The company's ability to secure high-value, long-term contracts with hyperscalers like Google and Meta suggests its AI growth is not a flash in the pan. Moreover, its balance sheet (current ratio of 1.71, debt-to-equity of 0.80) and 31.05% ROE highlight operational discipline.

However, investors must weigh the margin pressures from AI's lower profitability and the stock's recent volatility. Analysts remain bullish, with a "Strong Buy" consensus and a $528 average price target, but this optimism hinges on sustained demand for AI infrastructure. If the AI boom falters, Broadcom's valuation could face a reckoning.

For now, AVGO remains a compelling buy for those comfortable with high-growth, high-valuation tech stocks. But it's not without risks-monitoring AI demand and margin trends will be critical in the coming quarters.