Broadcom (AVGO) presents a compelling investment opportunity despite a post-earnings dip to $247 per share. The semiconductor and software giant delivered a solid Q2, with revenue up 20% year-over-year to $15 billion, slightly exceeding guidance, and a modest EPS beat.
While the report lacked the fireworks of its own Q1 report or Nvidia's (NVDA) recent blowout, Broadcom’s diversified portfolio, robust AI-driven growth, and undervaluation relative to its potential make it a bargain.
Trading at an enterprise value-to-EBITDA (EV/EBITDA) ratio of around 18x, compared to Nvidia at 25x, Broadcom offers strong value even though AVGO stock is up 92% from recent lows. Its forward-looking catalysts – flattening AI clusters, a recovering non-AI chip segment, and a thriving software business bolstered by the VMware acquisition – position it for sustained growth, making the current price an attractive entry point.
Broadcom’s semiconductor segment, which grew 17% year-over-year to $8.4 billion in Q2, remains a powerhouse, with AI-related revenue surging 46% to $4.4 billion. The company’s AI networking portfolio, including Tomahawk switches and Jericho routers, accounted for 40% of AI revenue, growing over 170% year-over-year.
A key growth catalyst is the flattening of AI clusters enabled by Tomahawk 6, which allows hyperscale customers to deploy clusters of over 100,000 AI accelerators in two tiers instead of three. This reduces latency, boosts bandwidth, and lowers power consumption, enhancing performance for AI workloads.
Broadcom’s Q3 AI revenue guidance of $5.1 billion, up 60% year-over-year, underscores sustained demand from hyperscale partners. Additionally, custom AI accelerators (XPUs) saw double-digit growth, with Broadcom anticipating at least three customers deploying million-unit AI clusters by 2027 for training frontier models. A shift toward inference to monetize these platforms could further accelerate XPU demand into 2026.
With AI semiconductor revenue expected to maintain its FY25 growth trajectory into FY26, Broadcom’s leadership in AI infrastructure positions it to capture significant market share, supporting its undervaluation at current levels.
While Broadcom’s non-AI semiconductor revenue dipped 4% year-over-year to $4 billion in Q2, the company signaled this segment is nearing a bottom, with sequential gains in broadband, enterprise networking, and service storage. As economic conditions stabilize, non-AI chip demand is poised to recover, driven by enterprise spending and 5G infrastructure growth.
This rebound complements Broadcom’s AI-driven gains, diversifying its revenue stream. Meanwhile, the infrastructure software segment, bolstered by last year’s VMware acquisition, grew 25% year-over-year to $6.6 billion, slightly above guidance. Broadcom’s success in transitioning enterprise customers from perpetual vSphere licenses to the subscription-based VMware Cloud Foundation (VCF) stack is a key growth driver. This shift enhances recurring revenue and margins, with software now accounting for over 40% of total revenue. The VMware integration strengthens Broadcom’s position in enterprise software, tapping into the growing demand for cloud and virtualization solutions.
With a debt-to-EBITDA ratio of approximately 3.5x, AVGO's balance sheet supports further investments in software and chip innovation, enhancing its long-term growth profile.
At $247, Broadcom is undervalued given its robust AI-driven semiconductor growth, recovering non-AI chip segment, and thriving software business fueled by VMware. The flattening of AI clusters positions Broadcom as a leader in hyperscale infrastructure, while non-AI recovery and software subscription growth provide diversified upside.
With an EV/EBITDA ratio below industry peers and strong Q3 AI guidance, AVGO offers a rare chance to invest in a diversified tech leader at a discount, poised to capitalize on AI, enterprise software, and chip market rebounds.
