Broadcom (AVGO): The AI Infrastructure Leader Navigating Tariffs and Growth

The semiconductor industry's next great boom is already here—and Broadcom (AVGO) is at its epicenter. With its Q2 2025 earnings expected to hit $14.9 billion in revenue, a 19% year-over-year surge, the company is proving that its strategic bets on AI infrastructure are paying off. Amid rising geopolitical risks and tariff headwinds, Broadcom's dominance in AI chips, networking hardware, and software is positioning it to outperform peers in a sector increasingly defined by the race to power the artificial intelligence revolution.

The AI Engine: Broadcom's $18 Billion Opportunity

Broadcom's AI revenue is soaring, driven by its unique “full-stack” infrastructure that combines cutting-edge semiconductors with proprietary software. In Q1 2025, AI-related sales surged 77% to $4.1 billion, and Q2 is expected to push that to $4.4 billion. Analysts project this segment could hit $18 billion by 2026, capturing over 20% of the global AI chip market.

At the heart of this growth is Broadcom's 3.5D chip packaging and co-packaged optics (CPO) technology, which enable hyperscalers like Amazon, Microsoft, and Google to build AI systems that process data at hyperscale speeds. Unlike competitors like NVIDIA, Broadcom's vertically integrated approach—from silicon photonics to software—gives it a structural advantage.

Networking Dominance: A Moated Cash Machine

Broadcom's networking division is another pillar of its growth. With a 60% share of the $12 billion data center switch market, its silicon photonics and CPO integration have solidified its position as the go-to supplier for cloud giants. This segment's 90% gross margins and recurring software revenue streams (now 50% of total sales) create a predictable cash flow machine.

The proof is in the numbers: Broadcom's free cash flow is projected to hit $33 billion in FY2025, enabling a $10 billion share buyback program and dividends. This financial flexibility is unmatched in a sector where peers struggle with margin pressure.

Tariff Risks? Outflanked by Software and AI

While tariffs threaten Broadcom's $2.2 billion wireless business (supplying Apple's 5G and Wi-Fi chips), the company's AI and software segments act as a buffer. Even if Apple's device sales face headwinds, its partnership with Broadcom on custom AI chips for servers—part of Apple's $500 billion AI infrastructure investment—could unlock new revenue streams.

Analysts note that wireless revenue represents just 16% of total sales, making it a manageable risk. Meanwhile, AI and software now account for 60% of Broadcom's revenue, ensuring resilience.

The Margin Resilience Myth

Critics argue that rising inflation and competition could erode Broadcom's margins. But the data tells a different story. Despite a slight dip in Q2's adjusted EBITDA margin to 66% (from 68% in Q1), the company remains in an elite tier. Broadcom's 66-68% EBITDA margins are 10-15% higher than peers like Intel or Marvell, thanks to its software-driven recurring revenue and premium pricing in AI semiconductors.

A Buy Now, Pay Later Valuation

With a P/E ratio of 41, Broadcom trades at a premium to its three-year average of 30x. But investors are paying for secular growth, not cyclical upsides. The $242 consensus price target (implying 20% upside from current levels) is conservative compared to Mizuho's $300 target, which assumes AI revenue hits $20 billion by 2026.

The bull case is clear: Broadcom's AI and networking moats are widening, its software cash flows are recession-proof, and its exposure to tariffs is overstated. With a dividend yield of 0.6% and a track record of buying back shares at disciplined prices, this is a stock built to outperform over the next decade.

Final Take: A Decade-Long Play

Broadcom isn't just riding the AI wave—it's defining it. Its full-stack infrastructure, margin resilience, and diversified revenue streams make it a rare semiconductor stock capable of thriving in both growth and inflationary cycles. For investors seeking a leader in the AI infrastructure boom, AVGO is the play to make now.

Backtest the performance of AVGO when 'buy condition' is triggered 5 days before quarterly earnings announcements and held for 20 trading days post-earnings, from 2020 to 2025.

Historical performance further supports this thesis. A strategy of buying AVGO five days before earnings and holding for 20 trading days delivered an average return of 15.93% since 2020, though with a maximum drawdown of -26.56%. This underscores the stock's momentum around earnings events but also highlights the importance of risk management.

Action: Buy AVGO. Set a target of $260 in 12 months, with a stop below $200.