Broadcom (AVGO): A Dual-Engine Growth Story in AI and Undervalued Infrastructure

The tech sector's relentless pursuit of AI innovation has overshadowed one critical truth: not all growth is tied to machine learning. Broadcom Inc. (AVGO), the semiconductor and software giant, exemplifies this dichotomy. While its AI-driven semiconductor business grabs headlines, its non-AI infrastructure and software divisions are quietly fueling a valuation that remains compelling. Here's why investors should see beyond the AI hype and consider Broadcom as a long-term buy.

The AI Engine: A Rocket Boost, Not the Entire Rocket
Broadcom's AI momentum is undeniable. Q2 2025 AI semiconductor revenue surged to $4.4 billion, a 46% year-over-year jump, with projections to hit $5.1 billion in Q3. CEO Hock Tan's confidence is clear: he expects ten consecutive quarters of AI revenue growth, driven by hyperscalers investing in data center infrastructure.

But AI is just one cylinder in Broadcom's engine. The broader semiconductor segment grew 17% year-over-year to $8.4 billion, while its Infrastructure Software division (led by VMware) posted a 25% revenue rise to $6.6 billion. This division's growth stems from VMware's shift to subscription-based cloud services, with 87% of its top clients now on the VMware Cloud Foundation (VCF) platform.

The Undervalued Non-AI Core: Cash Flow and Consistency
Analysts often overlook the non-AI backbone of Broadcom's business. Its infrastructure software segment—excluding AI contributions—delivered $6.6 billion in Q2 revenue, up 25%, fueled by enterprise cloud adoption. Meanwhile, non-AI semiconductor products (e.g., storage, wireless, and industrial chips) grew steadily at ~9%, contributing $4.0 billion to the top line.

The financials underscore this resilience:
- Free Cash Flow (FCF) hit $6.4 billion in Q2, a 44% year-over-year increase, representing 43% of revenue.
- Adjusted EBITDA margins rose to 67% of revenue, the highest in its history, thanks to scale efficiencies.
- Debt reduction continues: Long-term debt dropped to $61.8 billion, down from $66.3 billion in November .

These metrics highlight a business that's cash-rich and operationally strong, even excluding AI. The consensus among 25 analysts (as of July 2025) reflects this: a Strong Buy rating with an average price target of $298.67, implying 7.5% upside from its July 10 close of $275.40.

Why the Market Underestimates Non-AI Value
The stock's valuation multiples—P/S of 5.1x (based on $60 billion annualized revenue) and EV/EBITDA of ~5.0x—are reasonable given its cash flow and growth profile. However, investors may be pricing in risks like high debt ($61.8B) and valuation skepticism around VMware's transition.

Yet Broadcom's strategy addresses these concerns:
1. Debt deleveraging: Management aims to reduce debt to 2.0x EBITDA, down from current ~3.5x.
2. Shareholder returns: $7.0 billion was returned to investors in Q2 via dividends ($2.8B) and buybacks ($4.2B). This discipline ensures value retention even during market volatility.
3. Non-AI growth stability: Infrastructure Software's recurring revenue model (VMware subscriptions) provides predictable cash flow, a rarity in tech.

The Long-Term Play: AI + Infrastructure Synergy
Broadcom's true edge lies in its AI-infrastructure hybrid model. Its chips power AI data centers, while VMware's software manages those same environments. This synergy creates a self-reinforcing loop: AI growth drives semiconductor demand, while infrastructure software profits from enterprises adopting AI-driven cloud architectures.

Analysts project $5.1 billion in AI revenue by Q3, but the long game is clearer: 60% annual AI revenue growth into 2026, as hyperscalers like AWS and Google invest in next-gen AI infrastructure. Meanwhile, non-AI segments act as a buffer against tech cycles, ensuring steady cash flow.

Investment Thesis: Buy on Dip, Hold for the AI Wave
Broadcom is a dual-engine growth stock trading at a discount to its potential. Its non-AI businesses are undervalued due to market myopia, while AI's trajectory offers asymmetric upside. Key catalysts ahead:
- Q3 earnings (projected $15.8B revenue, 21% growth).
- Debt reduction progress, aiming for a cleaner balance sheet.
- VMware's subscription ramp, with ARR growth likely exceeding 20%.

Risks: Slower AI adoption, macroeconomic slowdowns, or VMware's execution misses could pressure the stock.

Final Take:
Broadcom's valuation metrics and financial health suggest it's a buy at current levels. The $275 price offers exposure to both a proven infrastructure leader and an AI growth engine. Hold it for the long term—the combination of cash flow, shareholder returns, and hybrid tech dominance makes this a rare all-weather tech play.

Action Item: Consider adding Broadcom to a diversified portfolio, with a target price of $300+ by late 2026. Monitor Q3 earnings for confirmation of AI and non-AI momentum.