Broadcom's AI Engine Roars: Sustained Momentum and Strategic Edge Justify a Buy

Broadcom (AVGO) has emerged as a standout player in the AI revolution, with its second-quarter fiscal 2025 results underscoring a relentless growth trajectory. The semiconductor giant's AI revenue surged 46% year-on-year to $4.4 billion, marking the ninth consecutive quarter of expansion. With guidance pointing to a tenth straight quarter of growth—$5.1 billion in Q3—the company is positioning itself as a critical supplier to hyperscalers like Google, Amazon, and Microsoft. This momentum, paired with the strategic launch of its Tomahawk 6 chip, suggests Broadcom is primed to capitalize on the $75 billion addressable market for AI infrastructure.

The AI Growth Engine: Why This Quarter Matters

Broadcom's AI revenue growth isn't just a blip—it's a structural shift. The $4.4 billion Q2 result represents 30% of total semiconductor revenue, with management forecasting further acceleration. The Tomahawk 6, a 102.4 Tbps Ethernet switch chip, is at the heart of this push. Designed for hyperscale data centers, it enables cost-effective AI training and inference clusters, directly competing with NVIDIA's proprietary solutions.

The chip's open-standard architecture and lower cost relative to rivals like Mellanox (NVIDIA) have already secured four new hyperscaler partnerships in Q2. This expansion into cloud infrastructure—where AI workloads are exploding—is a key differentiator.

Q3 Guidance: Strong Fundamentals, Even Stronger Margins

Broadcom's Q3 revenue guidance of $15.8 billion (21% YoY growth) reflects confidence in both AI and its broader semiconductor portfolio. But the real story is profitability. Adjusted EBITDA is expected to hit at least 66% of revenue, a margin so robust it rivals software giants. Free cash flow hit a record $6.4 billion in Q2, up 44% year-on-year, while shareholder returns—$7 billion in dividends and buybacks—reinforce management's focus on capital efficiency.

The infrastructure software segment (driven by VMware's cloud transition) also thrived, growing 25% YoY to $6.6 billion. VMware's shift to subscriptions has boosted recurring revenue to over 60% of bookings, stabilizing cash flows. This dual-engine growth—semiconductors and software—creates a moat against cyclical headwinds.

Navigating the Risks: Overbought or Overlooked?

Critics will point to valuation risks. Broadcom's stock is near its 52-week high ($265), and its RSI is overbought, suggesting some froth. Analysts are mixed: while some see a $300 price target, others caution about hyperscaler spending cycles. Indeed, the company's exposure to AI's boom-and-bust potential is real.

Yet fundamentals justify the premium. Broadcom's 65% operating margin and 79% gross margin are unmatched in the semiconductor sector. Even if hyperscaler spending flattens, the Tomahawk 6's design wins provide a multiyear runway. Meanwhile, the $9.5 billion in cash and disciplined capital allocation (e.g., $4.2 billion in buybacks in Q2) mitigate debt concerns.

The Buy Case: Valuation vs. Future Dominance

While the EV/EBITDA ratio isn't explicitly provided, Broadcom's 35% YoY EBITDA growth and $10 billion in Q2 EBITDA suggest it's trading at a forward multiple far below its growth rate. Comparatively, NVIDIA's P/E of ~35 vs. Broadcom's ~30 understates the latter's margin resilience.

The key risk—competitor encroachment—is mitigated by Broadcom's scale. Its $75 billion SAM is expanding as AI inference demands outpace training workloads, a shift the Tomahawk 6 is uniquely positioned to exploit.

Final Analysis: Buy with an Eye on the Long Game

Broadcom's AI momentum is no flash in the pan. The Tomahawk 6's success and VMware's software tailwinds create a dual catalyst for outperformance. While valuation metrics may appear stretched, the company's margin durability and hyperscaler partnerships justify a buy rating. Investors should monitor Q3 execution closely, but the fundamentals suggest this is a stock to hold through market volatility.

Recommendation: Buy, with a 12-month target of $290–$300. Risks include a sharper-than-expected slowdown in cloud spending, but the structural AI trend remains intact.

Disclosure: The analysis is based on publicly available data as of June 2025 and does not constitute personalized financial advice.