Broadcom's AI Surge: A Hidden Gem in a High-Growth Market?

The AI revolution is reshaping tech's landscape, and Broadcom (AVGO) is quietly cementing its position as a leader in the custom chip sector. Despite soaring valuations, the stock's fundamentals suggest it may still be undervalued relative to its explosive growth trajectory. Let's unpack why.

AI Revenue Growth: A Rocket Ship Ignites

Broadcom's AI revenue surged 46% year-over-year (YoY) in Q2 2025 to $4.4 billion, propelling total revenue to $15.0 billion (a 20% YoY increase). The company now projects Q3 AI revenue to hit $5.1 billion, with overall revenue expected to rise to $15.8 billion—slightly above consensus estimates.

But the real story lies in its long-term potential. Analysts estimate Broadcom's AI revenue could reach $30 billion by 2027, fueled by inference demand from hyperscalers like Microsoft, Alphabet, and Meta. These companies are shifting focus from AI training to real-time decision-making (inference), where Broadcom's custom ASICs outperform GPUs in speed and efficiency.

Valuation: A Premium, but Justified?

Broadcom's multiples are sky-high compared to the S&P 500:
- P/S of 21.5x vs. 3.0x for the S&P.
- P/E of 95.1x (adjusted to 42.8x) vs. 26.4x for the S&P.

However, forward metrics tell a different story. Analysts expect the P/E to drop to 30.78x by 2026, reflecting robust earnings growth. With a 3-year revenue CAGR of 24.7% and a 60% AI revenue CAGR through 2027, the stock's premium may be sustainable.

Analyst Consensus: Bullish Despite Risks

Analysts have raised price targets post-Q2 results, with the average now at $254, up from $190 earlier this year. Some optimistic estimates even hit $2,150—though this likely reflects a typo (given the current price of ~$250), it underscores the bullish sentiment. Key growth drivers include:
- Expanding customer base: From three (Meta, Alphabet, ByteDance) to seven by 2027, adding Oracle, xAI, and SoftBank.
- VMware synergy: The hybrid cloud platform VMware Cloud Foundation 9.0 strengthens Broadcom's enterprise software moat.

Risks on the Horizon

• Valuation sensitivity: A slowdown in AI adoption or competition (e.g., from NVIDIA's GPUs) could pressure the stock.
• Integration costs: FY2024 GAAP net income dipped due to VMware integration, though free cash flow remains $19.4 billion—a solid buffer.

Competing with NVIDIA: A Different Play

NVIDIA (NVDA) dominates GPUs with a 90% data center share, but Broadcom's 70% custom AI chip market share gives it an edge in specialized inference workloads. While NVIDIA's margins and diversification (gaming, automotive) offer stability, Broadcom's AI revenue is growing 45% YoY, versus NVIDIA's 9%.

The Bottom Line: A Buy with Caution

Broadcom's dominance in AI inference, coupled with its robust balance sheet ($9.5 billion in cash, 5.5% debt-to-equity), positions it as a long-term growth play. While the valuation is rich, the 60% AI revenue CAGR and expanding customer pipeline suggest the stock could still outperform.

Investors should consider gradual accumulation, prioritizing dips below $220. However, remain vigilant to macro risks and competition. For those with a multi-year horizon, AVGO's blend of AI tailwinds and defensive cash flows makes it a compelling pick—even at today's prices.

Final Take: Broadcom isn't cheap, but its AI moat and hyperscaler relationships may justify the premium. For growth investors, the risk/reward here still leans bullish.