Broadcom's AI Semiconductor Surge Fuels Free Cash Flow Dominance: A Buy Signal for Long-Term Gains

Broadcom Inc. (AVGO) has cemented its position as a leader in the AI revolution with its second-quarter fiscal 2025 results, showcasing a 46% year-over-year jump in AI semiconductor revenue to $4.4 billion. This milestone, paired with record free cash flow of $6.4 billion and aggressive guidance, underscores why investors should take notice of this semiconductor and software powerhouse.

AI Semiconductor Growth: A Nine-Quarter Streak and Counting

Broadcom's dominance in AI networking is undeniable. The company's AI semiconductor revenue has now grown for nine consecutive quarters, with Q2's 46% surge driven by hyperscale data centers deploying its Tomahawk switches, Jericho routers, and NICs. These components are critical for linking server clusters in AI supercomputers, where Ethernet remains the preferred open standard over proprietary alternatives like NVIDIA's NVLink.

CEO Hock Tan emphasized that Q3 AI revenue will accelerate to $5.1 billion—a 60% year-over-year increase—marking the tenth straight quarter of growth. This momentum is fueled by hyperscalers like Amazon, Google, and Microsoft ramping up investments in AI infrastructure to monetize large language models (LLMs) and generative AI platforms. Broadcom's new Tomahawk 6 switch, capable of 102.4 terabits per second throughput, positions it to capture even more share as AI clusters scale in size and complexity.

Infrastructure Software: VMware's Role in the Growth Story

While AI semiconductors steal headlines, Broadcom's infrastructure software division—bolstered by its acquisition of VMware—delivered 25% year-over-year revenue growth to $6.6 billion in Q2. The transition of VMware's legacy perpetual licenses to its Cloud Foundation (VCF) subscription model is paying dividends. This recurring revenue stream ensures stable cash flow, even as the company navigates regulatory hurdles and a 5% dip in non-AI semiconductor sales due to soft industrial demand.

Free Cash Flow: The Engine of Shareholder Returns

Broadcom's $6.4 billion in free cash flow (43% of revenue) in Q2 shattered expectations, enabling $7.0 billion in shareholder returns through buybacks and dividends. The company repurchased $4.2 billion of its stock and paid $2.8 billion in dividends, with another $0.59 per share dividend scheduled for June. With a $10 billion share repurchase authorization still in play, this cash flow machine is poised to continue rewarding investors.

Why This Is a Long-Term Buy

1. AI Networking Monopoly: Broadcom's Ethernet-based solutions are the de facto standard for hyperscale AI clusters. Competitors like NVIDIA lack the networking expertise to challenge its leadership in this space.
2. Software Synergy: VMware's transition to subscriptions adds predictability to cash flows, complementing the cyclical nature of semiconductor sales.
3. Capital Allocation Discipline: The company's ability to generate $6.4 billion in free cash flow while maintaining a 79.4% gross margin signals operational excellence. Even the anticipated Q3 gross margin dip (due to higher XPU mix) won't derail profitability.
4. Valuation: At a 19x forward EV/EBITDA, Broadcom trades at a discount to peers like NVIDIA (25x) despite its fortress balance sheet ($9.5 billion in cash vs. $69.4 billion in debt).

Risks to Consider

• Regulatory Uncertainty: Export controls on AI chips could slow growth, though Broadcom's focus on open standards like Ethernet may mitigate this.
• VMware Transition: Full migration to subscription models is 1.5 years away, leaving some revenue volatility.
• Non-AI Semiconductor Softness: The 5% dip in non-AI sales shows vulnerability to broader economic cycles, though management expects stabilization.

Investment Thesis: Buy for the AI Decade

Broadcom's Q2 results confirm its dual-pronged strategy—AI networking and VMware software—is working. With AI semiconductor revenue set to hit $5.1 billion in Q3 and free cash flow compounding at 44% annually, this stock is a buy for investors willing to ride the AI wave. While risks exist, the combination of recurring software revenue, fortress cash flow, and unshakable networking dominance makes AVGO a rare “buy-and-forget” name for the next decade.

Recommendation: Accumulate positions on dips below $600. Set a 12-month price target of $750-$800, based on AI revenue growth and 20x 2026 EBITDA multiples. Avoid chasing momentum; instead, use volatility as an opportunity to build a long-term position.