Is Broadcom (AVGO) Still a Buy Despite an 18% Pullback?

Broadcom (AVGO) has experienced a sharp 18% decline in its stock price following its Q4 2025 earnings report, driven by concerns over margin compression in its rapidly growing AI semiconductor business. This pullback has sparked debate among investors: Is this a buying opportunity for a company with a dominant position in high-margin infrastructure software and AI hardware, or does the near-term margin pressure signal a reevaluation of its stretched valuation?

Valuation Metrics: A Tale of Two Narratives

Broadcom's valuation appears paradoxical at first glance. Its trailing P/E ratio of 84.75 is among the highest in the technology sector, reflecting investor enthusiasm for its earnings growth. However, the PEG ratio-a metric that adjusts for growth-tells a different story. As of late 2025, AVGO's PEG ratio stood at 0.38, significantly below its 10-year average of 0.59 and the sector average of 0.76. This suggests the stock is undervalued relative to its earnings trajectory, particularly given that non-GAAP EPS grew by 235.8% year-over-year.

The disconnect between P/E and PEG ratios highlights a critical dynamic: Broadcom's earnings growth is outpacing its valuation multiples. For context, a PEG ratio below 1 typically indicates a stock is undervalued, and AVGO's current ratio implies investors are paying less for each unit of earnings growth compared to historical norms. This could make the recent pullback an attractive entry point for long-term investors, assuming the company maintains its growth momentum.

AI-Driven Growth vs. Margin Compression

Broadcom's AI semiconductor segment is a double-edged sword. Revenue from this division surged 74% year-over-year in Q4 2025 to $6.5 billion, with management projecting $8.2 billion in Q1 2026-a near-doubling from the prior year.

This growth comes at a cost. The CFO explicitly warned that AI hardware carries lower margins than Broadcom's infrastructure software business, leading to a 100-basis-point contraction in gross margins quarter-over-quarter.

While margin compression is a near-term headwind, it is not unprecedented. The company's overall gross margin remains robust at 78.6%-a five-year high-and its free cash flow generation remains exceptional. For Q4 2025, Broadcom produced $7.47 billion in free cash flow, and for fiscal 2025 as a whole, it generated $26.9 billion. These figures underscore the company's ability to convert revenue into cash, even as AI hardware dilutes profitability.

Balancing the Equation: Is the Pullback a Buying Opportunity?

The 18% decline in AVGO's stock price post-earnings reflects market skepticism about margin sustainability. However, this reaction may overstate the risk. While AI hardware margins are lower, the segment's growth is accelerating at a time when global demand for AI infrastructure is surging. Moreover, Broadcom's infrastructure software segment-responsible for recurring revenue and high margins-provides a stabilizing counterweight.

Investors must also consider the broader context. The PEG ratio of 0.38 suggests the market is already pricing in significant margin pressures, leaving limited downside if the company meets or exceeds earnings expectations. Additionally, Broadcom's financial flexibility-evidenced by its $26.9 billion in annual free cash flow-positions it to reinvest in growth, return capital to shareholders, or navigate macroeconomic headwinds.

Conclusion

Broadcom's stock pullback is a function of short-term margin concerns colliding with long-term growth optimism. While the AI segment's profitability challenges are real, they are not insurmountable, and the company's valuation remains compelling relative to its earnings growth. For investors with a multi-year horizon, the current price offers an opportunity to participate in a business that combines high-margin software recurring revenue with explosive AI hardware growth.

That said, caution is warranted. The AI market is still evolving, and hyperscale customer concentration could amplify risks if demand slows. However, given Broadcom's dominant market position, financial strength, and historically low PEG ratio, the 18% correction appears to be a buying opportunity rather than a warning sign.