Broadcom (AVGO): The Undervalued Titan of AI Infrastructure

The race to dominate AI infrastructure is no longer about who builds the fastest GPU. It's about who controls the arteries of data—high-speed networking, cost-effective silicon, and the seamless orchestration of massive compute clusters. Broadcom (AVGO) sits at the epicenter of this transformation, yet its stock remains strikingly undervalued relative to its potential. Let's dissect why this $240 billion semiconductor giant is the top AI infrastructure play for 2025.

The AI Infrastructure Revolution: Broadcom's Dual Engine

The AI ecosystem is bifurcating: training (the expensive, compute-heavy phase of model development) is giving way to inference (the monetization phase where AI models are deployed at scale). This shift is Broadcom's sweet spot. Its two pillars—connectivity switches and custom XPUs (accelerators)—are the unsung heroes of this transition.

1. Networking Dominance:
   Broadcom's Tomahawk switches and Jericho routers are the backbone of hyperscale data centers. These chips enable “elephant workloads”—AI clusters requiring thousands of XPUs—to communicate at light speed. In Q2 2025, AI-related networking revenue surged 170% YoY, accounting for 40% of AI revenue. Microsoft's $13 billion AI run rate and OpenAI's $10 billion ARR are built on this infrastructure.

2. XPU Leadership:
   While NVIDIA (NVDA) dominates GPU sales, Broadcom's custom XPUs (focusing on inference efficiency) are cheaper and more power-optimized. Hyperscalers like Google, Meta, and ByteDance are adopting these chips to reduce costs. By 2027, Broadcom aims to supply 1 million AI accelerator clusters annually, a goal supported by its 2nm fabrication roadmap and partnerships with VMware's software stack.

The $60B–$90B Revenue Target: Why It's Achievable

Broadcom's AI revenue is on a hypergrowth trajectory:
- 2024: $12 billion (baseline).
- 2025: $19–$20 billion (58% growth).
- 2026: $30–$32 billion (60% growth).
- 2027: $50–$65 billion (per conservative estimates), with upside to $90 billion if all four prospective hyperscalers (including rumored Apple and OpenAI deals) come online.

Key drivers:
- Hyperscaler Partnerships: Three major clients (Meta, Google, ByteDance) are already scaling, while four more are in development phases. Each new customer could add $15–$20 billion in revenue.
- Inference Surge: Microsoft's AI revenue grew 175% YoY in 2024, and Alphabet's token processing volumes rose 900% YoY. Broadcom's chips are central to these gains.
- Networking Synergy: Every XPU cluster requires Broadcom's Ethernet switches. This creates a “flywheel effect”—more XPUs mean more networking sales, and vice versa.

Why Broadcom is Undervalued

Despite its dominance, Broadcom trades at a 50% discount to NVIDIA on a forward price-to-sales basis. This underappreciation stems from two misperceptions:

1. Myth of NVIDIA Supremacy:
   NVIDIA's $180 billion AI data center revenue in 2024 dazzles, but Broadcom's 76% operating margins (vs. NVIDIA's 40%) and lower pricing make it a better value. The market has yet to fully factor in Broadcom's 65%+ CAGR in AI revenue through 2027, which outpaces NVIDIA's growth trajectory.

2. Neglecting Software Leverage:
   Broadcom's VMware acquisition isn't just a cost play—it's a software moat. VMware's cloud management tools (e.g., vSphere, NSX) now integrate with Broadcom's hardware, creating a turnkey AI infrastructure stack. VMware's software revenue grew 60% YoY in 2024, with margins hitting 92.5%. This hybrid hardware-software model is underpriced in the stock.

Risks and Mitigations

• Non-AI Softness: Consumer semiconductor revenue fell 5% YoY in Q2 2025. However, this segment is shrinking as AI revenue scales.
• Geopolitical Headwinds: China accounts for 10% of revenue. Tariffs or sanctions could disrupt ByteDance partnerships. Mitigation: Diversification into U.S./European hyperscalers.
• Valuation Risk: Broadcom's 38x forward P/E assumes flawless execution. A 10% miss on 2027 targets could pressure the stock.

Investment Thesis: Buy the Discounted Growth Engine

Broadcom is a “picks and shovels” play in the AI gold rush. Its networking and XPU dominance, paired with VMware's software leverage, form an unassailable moat. At current prices, the stock offers:
- $44.2 billion in 2027 AI revenue (Morningstar's midpoint) vs. a forward P/S of 19x—far below peers.
- Upside to $250+ per share if it hits the $90B revenue target.

Recommendation: Accumulate AVGO on dips below $450. The catalysts—Q4 2025 AI revenue guidance, VMware integration milestones, and hyperscaler wins—are all within sight. This is a 2025 stock to own for the AI decade.

Disclosure: This analysis is for informational purposes only and not financial advice. Always conduct your own research.