Is Broadcom (AVGO) the Must-Buy AI Semiconductor Play as AI Chips Power the Next Inference Revolution?

The AI semiconductor landscape in 2025 is defined by explosive demand for custom silicon and networking solutions, and no company has capitalized on this trend more aggressively than Broadcom (AVGO). With AI-driven revenue surging and a dominant position in infrastructure software, Broadcom has positioned itself as a critical player in the AI revolution. However, investors must weigh its strategic strengths against emerging margin risks and industry dynamics to determine whether it is a must-buy stock.

Strategic AI Semiconductor Growth: A Leadership Edge

Broadcom's dominance in AI semiconductors is underpinned by its leadership in custom silicon and high-speed networking. In Q4 FY 2025, the company reported AI semiconductor revenue of $6.5 billion, a 74% year-over-year increase, driven by demand for custom AI accelerators and Ethernet AI switches. This growth is fueled by its cutting-edge product roadmap, including the Tomahawk 6, Jericho4, and co-packaged optics (CPO) solutions like the third-generation TH6-Davisson predicted by AI analysts. These innovations address the exponential bandwidth demands of AI workloads, solidifying Broadcom's role as the backbone of AI data centers.

The company's strategic focus on end-to-end AI infrastructure further strengthens its position. By integrating silicon, networking, and software, Broadcom offers scalable solutions that align with the needs of hyperscale cloud providers and enterprises. As management stated, this approach has enabled 16 consecutive quarters of outperforming Wall Street expectations, with AI semiconductor revenue projected to double in Q1 2026 to $8.2 billion.

Customer Momentum and Backlog: A Double-Edged Sword

Broadcom's customer adoption of AI semiconductors is robust, with an AI switch backlog exceeding $10 billion and a total AI order backlog of $73 billion across XPUs and networking components according to investor reports. This backlog, however, is heavily concentrated among a small number of large customers, introducing dependency risks. For instance, the company's AI systems sales-while driving revenue growth-require packaging third-party components like memory, which increases costs and pressures gross margins.

Despite these challenges, Broadcom's infrastructure software segment, including VMware Cloud Foundation, has seen 19% year-over-year growth to $6.9 billion in Q4 FY 2025. This diversification into high-margin software complements its hardware business, creating a more resilient revenue model.

Margin Risks: Balancing Growth and Profitability

While Broadcom's AI semiconductor segment is a growth engine, it comes with margin headwinds. In Q4 FY 2025, the segment's gross margin stood at 68% according to financial reports, but management warned of a 100-basis-point decline in Q1 2026 to 67% as reported by Seeking Alpha. This drop is attributed to the lower-margin nature of AI system sales compared to networking chips and software. For context, NVIDIA's Data Center segment achieved a 73.4% gross margin in Q3 2025, highlighting the competitive pressure Broadcom faces in maintaining pricing power.

The industry-wide shift toward advanced packaging and memory integration also strains supply chains. CoWoS-L packaging delays and a reallocation of manufacturing capacity away from consumer electronics have exacerbated AI memory shortages, potentially impacting Broadcom's ability to meet demand without further margin compression.

Industry Context and Long-Term Outlook

Broadcom's margin risks are not unique to its operations. The broader AI semiconductor industry is grappling with similar challenges. For example, Micron Technology reported AI memory-driven gross margins of 50% in Q4 2025, underscoring the sector's mixed margin dynamics. However, Broadcom's leadership in AI infrastructure and its total backlog of $162 billion provide a strong buffer against short-term headwinds.

Management expects AI semiconductor revenue to grow from 24% in 2025 to 50% in 2026 as projected by analysts, supported by continued demand for custom silicon and software. While operating margins may remain stable according to financial statements, investors should monitor the company's ability to innovate and scale its AI offerings without sacrificing profitability.

Conclusion: A High-Conviction Play with Caveats

Broadcom's strategic positioning in AI semiconductors, coupled with its infrastructure software growth and robust backlog, makes it a compelling long-term investment. However, margin pressures from AI system sales and industry-wide supply constraints necessitate caution. For investors willing to accept near-term margin volatility in exchange for leadership in the AI revolution, Broadcom remains a must-buy-provided the company can execute its roadmap and maintain its technological edge.