Broadcom (AVGO) Earnings Preview: Can AI’s Engine Keep the Multiple Aloft?

Broadcom has become indispensable to the AI build-out: it designs custom accelerators (XPUs/ASICs) for hyperscalers, supplies the high-speed Ethernet switching that stitches AI clusters together, and—post-VMware—sells mission-critical infrastructure software that monetizes the data center stack. The stock has ripped ~23% over the past three months (outpacing the SOX), and the multiple has expanded with it—AVGO now trades around ~37x forward EPS, well above its ~25x historical median and even above some AI peers. That valuation presumes AI revenues continue to compound at a breakneck pace while margins hold near best-in-class levels. Thursday night’s print will test both assumptions.

What the Street Expects (and What Management Guided)

Consensus (FactSet) is looking for Q3 revenue of ~$15.83B and adjusted EPS of ~$1.66—essentially in line with Broadcom’s guidance for ~$15.8B revenue (+21% y/y). Within that, management in June guided to:

• Semiconductor revenue ~$9.1B (+25% y/y)
• AI semiconductor revenue ~$5.1B (+60% y/y)
• Infrastructure software revenue ~ $6.7B (+16% y/y)
• Adjusted EBITDA ≥66%

Street color heading in is constructive but measured. Several houses (Citi, Piper, Cantor, MS, others) expect a beat/raise led by custom AI silicon and resilient AI networking, while noting that Broadcom is not typically a “big beater” (historical sales surprises ~50 bps). The debate is less about Q3 delivery and more about the slope of FY26 AI, the pace of non-AI semi recovery, and whether gross/EBITDA margins can remain near guide with mix shifting toward lower-GM custom silicon.

CFRA’s Angelo Zino: Why AI Still Drives the Bus

CFRA’s Angelo Zino frames the key question succinctly: “You know, I think when we think about Broadcom here, the story will continue to be AI. The thing is, AI will continue to be a bigger piece of their revenue and specifically their semiconductor business.” He adds that management’s “60% plus growth rate in terms of the AI semi-business” is expected to persist “through the end of calendar 2026 with a potential acceleration in the second half of next year,” and that the watch-item is new AI customers entering Broadcom’s ecosystem and ramping over the next 6–8 quarters. On margins, Zino notes that AI can dilute gross margin versus other silicon lines, but scale supports EBITDA: “we do think [they’ll] be… able to sustain these margins or roughly around a fairly tight range here over the next couple of quarters.”

What to Compare Against: Last Quarter’s Scorecard

In fiscal Q2 2025, Broadcom posted record revenue of $15.0B (+20% y/y), all organic (VMware was fully consolidated in the prior year). Segment detail:

• Semiconductor Solutions: $8.4B (+17% y/y) with AI semiconductor revenue >$4.4B (+46% y/y). AI networking (Ethernet) was ~40% of AI revenue.
• Infrastructure Software: $6.6B (+25% y/y); management highlighted strong VMware Cloud Foundation (VCF) adoption among large accounts.
• Gross margin ~79.4%, adjusted EBITDA $10B (67% margin), and FCF ~$6.4B (~43% of revenue).
• Outlook then called for Q3 AI semi ~$5.1B, EBITDA ≥66%, and reiterated that AI semi growth should sustain into FY26.

That makes Thursday’s report a clean “did they do what they said?” checkpoint, with three sub-plots: (1) Does AI revenue exceed the $5.1B marker? (2) Do semis ex-AI finally lift off the bottom after multiple soft quarters? (3) Does EBITDA hang near 66% despite mix?

VMware: Strategic, Scaled—and Now Facing EU Scrutiny

Broadcom’s $61B VMware acquisition reshaped the P&L, creating a software pillar with very high gross margins and sticky enterprise relationships. The synergy story is working (broad VCF uptake), but CISPE’s EU court challenge alleges restrictive licensing and price hikes. While Zino isn’t “necessarily concerned” near term, any adverse EU outcomes could complicate the infrastructure software growth narrative and investor confidence in mid-70s operating margins in that segment.

The Big Things to Watch Thursday Night

AI Custom Silicon & Customer Adds: Investors will parse commentary on hyperscaler ramps (e.g., TPU v6/v7p timing), potential new ASIC customers, and the inference vs. training mix. Any sign that 60% y/y AI growth can accelerate in 2H26 supports the multiple.

AI Networking Share & Competition: With Nvidia pushing Spectrum switches, look for Broadcom’s view on Ethernet adoption and Tomahawk 6 traction enabling two-tier fabrics for 100k+ accelerator clusters.

Non-AI Semis: Citi and others see this bucket flat to slowly recovering after a deep cyclical reset (~40% off peak). A turn here offsets AI mix-driven GM pressure.

Margins & Mix: Street will scrutinize gross margin vs. the cadence of XPUs/ASICs. Delivery at or above 66% EBITDA is key for valuation defense.

Cash Generation & Capital Returns: With FCF >$6B last quarter (and $22B LTM), updates on debt pay-down post-VMW, buybacks, and dividend capacity matter, particularly if software legal noise persists.

FY26/FY27 Framework: Several brokers have moved targets higher on long-term AI revenue potential (some sketching $25–30B custom silicon in CY26 and $40B+ by CY27). Investors will want guardrails, not just ambition.

Regulatory/Export Controls: Management has flagged a fluid backdrop; any incremental restrictions could alter the geographic mix of AI demand.

The Setup: Great Company, High Bar

The near-term risk isn’t that Broadcom “misses”—its 12-quarter EPS beat streak and measured guide style argue otherwise. The risk is that even a solid beat/inline guide may not expand the multiple further with AVGO already at ~37x forward P/E and September sentiment skittish post-Nvidia-adjacent volatility. Conversely, confirmation of new AI customer ramps, resilience in software, and early signs of a non-AI semi recovery could keep the “AI flywheel + durable margins” narrative intact—and dips would likely be bought.

Bottom line: Broadcom remains one of AI’s purest “picks-and-shovels” plays—with custom silicon and Ethernet networking scaling alongside hyperscaler demand, and VMware underwriting profitability and cash returns. If Thursday’s print shows AI at/above plan, EBITDA near 66%, and credible visibility into FY26, the premium can hold. If mix pressures margins or AI cadence blinks, the bar’s high enough to invite a breather—setting up the next buy-on-weakness for long-duration believers.