Broadcom's Margin Resilience and AI Ambitions: A Hidden Growth Engine?

Eli GrantMonday, Jun 9, 2025 5:06 am ET
16min read

The tech world is obsessed with the next big thing, but sometimes the overlooked strengths of established players can be just as transformative. Broadcom, a semiconductor and software giant, has quietly become a linchpin in the artificial intelligence revolution. Its Q1 2025 earnings reveal a company capitalizing on AI's explosive growth while maintaining financial discipline that few in its sector can match. Yet, its stock price—lagging behind peers like NVIDIA—suggests the market may still be underestimating its potential.

Broadcom's recent results are a masterclass in balancing ambition with profitability. AI revenue surged to $4.1 billion in Q1, a 77% year-on-year jump, driven by hyperscalers racing to build out AI data centers. The company's next-gen AI accelerators, like its two-nanometer XPU with 3.5D packaging, are designed to deliver 10,000 teraflops of compute power—critical for training large language models. Meanwhile, its Tomahawk 6 switch, capable of 200G ports and 1.6 terabit bandwidth, is enabling hyperscalers to link clusters of up to 500,000 accelerators. These advancements are not just technical feats; they're revenue engines.

What's most striking, however, is how Broadcom is turning this growth into profit without sacrificing margins. Despite ramping up R&D spending, semiconductor operating margins held steady at 57%, while Infrastructure Software margins—bolstered by VMware's shift to subscription models—rose to 76%. This resilience is underappreciated. Even as non-AI semiconductor revenue dipped 9% sequentially (due to softness in wireless and industrial markets), the company's focus on high-margin AI and software segments kept overall adjusted EBITDA at 68% of revenue, outperforming guidance.

The long-term AI opportunity here is staggering. Broadcom estimates its Serviceable Addressable Market (SAM) could hit $60–90 billion by fiscal 2027, driven by hyperscalers' plans to build clusters of 1 million XPUs. But this figure doesn't include four additional hyperscalers already working on custom accelerators—a sign the SAM could expand further. The company's partnership with VMware also creates a virtuous cycle: as enterprises adopt VMware's Private AI Foundation (used by 39 early customers), Broadcom's software and hardware stack becomes an integrated solution for on-prem AI workloads.

Yet the market remains skeptical. Broadcom's stock has underperformed the Nasdaq 100 over the past year, even as peers like NVIDIA soar. Part of this is due to near-term headwinds: non-AI segments face inventory adjustments, and gross margins may dip slightly in Q2 as software revenue mix shifts. But these are short-term bumps in a multi-year AI journey.

Investors should also consider Broadcom's balance sheet. Despite $6 billion in free cash flow (40% of revenue), its leverage from the VMware acquisition remains a concern. Yet the integration of VMware's software with Broadcom's chips is proving synergistic, not just costly. The company's ability to command premium pricing for its AI-optimized hardware and software stack suggests it can outpace peers in margin retention.

Regulatory risks loom—particularly in the EU and China—but Broadcom's hyperscaler partnerships (three already scaling, four more in development) are too entrenched to be easily disrupted. The real risk lies in execution: can it deliver its two-nanometer XPU and 500,000-node clusters at scale? The early signs are positive.

For investors, the calculus is this: Broadcom is trading at just 17x forward earnings, far below the S&P 500's average and a fraction of AI-focused peers. Its margin resilience and long-term AI SAM suggest it's due for revaluation. The stock could be a rare “both/and” play: a beneficiary of near-term AI infrastructure spending and a future leader in the software-hardware stack defining enterprise AI.

In a market fixated on the next disruptor, Broadcom's blend of financial discipline and strategic positioning in AI's backbone infrastructure may finally get its due. For investors willing to look beyond the noise, this could be the overlooked growth story of 2025.

Investment Takeaway: Consider adding Broadcom to a diversified tech portfolio, particularly if its stock dips further on near-term concerns. The AI-driven margin tailwinds and underappreciated SAM suggest a compelling risk/reward profile.