Broadcom's Golden Cloud: Can Strong Financials Outweigh Customer Exodus?

Broadcom (AVGO) has emerged as a tech titan, leveraging its semiconductor dominance and VMware acquisition to fuel explosive growth. Yet beneath its soaring stock price and record revenues lurks a critical question: Is its revenue model sustainable amid rising customer attrition and regulatory scrutiny?

The Financial Triumph
Broadcom's Q2 2025 results were a masterclass in execution. Infrastructure software revenue hit $6.6 billion, up 25% year-over-year, driven by VMware Cloud Foundation (VCF) adoption, which now boasts 87% penetration among its top 10,000 customers. AI semiconductor sales, meanwhile, skyrocketed to $4.4 billion, with hyperscalers like Alphabet and Meta adopting its XPUs at scale.

The company's free cash flow of $6.4 billion (43% of revenue) and relentless buybacks ($4.2 billion in Q2 alone) have fueled a 5.2% YTD stock rise, outpacing peers. Analysts now project revenue to nearly double to $112 billion by 2028, with a consensus price target of $282—12% above current levels.

The Customer Exodus Crisis
Yet this financial might clashes with mounting customer backlash. The Dutch Ministry of Infrastructure recently won a landmark case forcing Broadcom to provide two years of exit support for its migration from legacy VMware products, after costs surged 85% to nearly €4 million annually. Similar lawsuits from AT&T and EU antitrust probes hint at broader dissatisfaction.

Customers cite 500% price hikes for bundled licenses, forced subscription models, and lost perpetual licenses post-acquisition. Forums and legal filings reveal tales of unresponsive support teams and “shelfware” scenarios—customers paying for unused features.

Analysts warn that migration to rivals like Nutanix or Microsoft Azure is accelerating, driven by cost and compliance concerns. Even Gartner cautions that while switching from VMware is complex, firms like Rackspace are doing so due to “exploitative licensing.”

Valuation: A High Wire Act
Broadcom's stock trades at a forward P/E of 34x, nearly double its 10-year average and far above peers like AMD (5.8x) or Marvell (6.8x).

Investors are betting that AI and cloud infrastructure dominance will offset churn. But the risks are stark:
- Margin Pressures: Q3 gross margins are expected to drop 130 bps as lower-margin XPUs gain share.
- Regulatory Headwinds: The Dutch ruling could set a global precedent, forcing Broadcom to subsidize customer exits.
- Retention Risks: While 87% of top customers use VCF, many may stay only due to contractual lock-in, not loyalty.

Investment Verdict: Proceed with Caution
Broadcom's near-term growth is undeniable, but its valuation assumes flawless execution in a hostile environment. The stock's premium multiple demands flawless retention of legacy VMware customers and no material setbacks in AI adoption.

For investors, now may not be the time to chase this stock. The $2 trillion market cap target hinges on assumptions that customer attrition is temporary and regulators will back down—a gamble too risky at current prices.

Actionable Takeaway:
- Hold or Trim Positions: If you own AVGO, consider scaling back unless the stock corrects below $200.
- Avoid New Buys: Wait for a pullback or clearer signs that customer retention is stabilizing.
- Monitor Legal Risks: A settlement with the EU or U.S. regulators could reset the valuation calculus.

In tech, growth is fleeting. Broadcom's golden cloud may yet rain down on shareholders, but the storm clouds of customer exodus and regulatory backlash are growing. Proceed with eyes wide open.