Is Broadcom (AVGO) the Other AI Trade?
By IPO Edge Editorial Staff
Broadcom’s (AVGO) AI business is growing faster than almost anyone expected.
Last quarter, AI semiconductor revenue hit $10.8 billion, up 143% year over year. Management expects that to reach $16.0 billion this quarter, a jump of more than 200%.
That is the kind of number that gets noticed.
Broadcom landed third among semiconductor searches by financial pros last month, behind only NVIDIA and Micron, according to our TrackStar data.
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The stock isn’t cheap. But the growth is real, the cash flow is enormous, and the AI story is just getting started.
Here’s our take.
Broadcom’s Business
Broadcom designs the custom chips and networking gear that move data inside the world’s largest data centers.
What sets it apart is range. The company holds roughly 18,000 patents across 24 category-leading divisions, spanning silicon and software.
Its customers include hyperscale cloud providers, telecom carriers, and enterprise IT departments. Broadcom spent $11.0 billion on R&D in FY25 to keep that edge sharp.
Broadcom segments its business into the following areas:
- Semiconductor Solutions (68% of total revenues) – Custom AI accelerators (XPUs), AI networking, broadband, server and storage chips, wireless, and industrial silicon
- Infrastructure Software (32% of total revenues) – Cybersecurity, enterprise and mainframe software, Fibre Channel networking, and the VMware private cloud platform
Second quarter revenue rose 48% year over year to a record $22.2 billion. Semiconductor revenue jumped 79% as AI demand surged, while software grew a steadier 9%.
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GAAP net income nearly doubled to $9.3 billion. The company guided third quarter revenue to roughly $29.4 billion, up 84% from a year ago.
The growth engine here is custom silicon. Broadcom co-designs AI chips with a handful of giant cloud customers, who want alternatives to off-the-shelf GPUs.
That model locks in multi-year demand and keeps margins high, since Broadcom owns the intellectual property rather than the manufacturing.
On the software side, the VMware integration continues to lift profitability as the company shifts customers to subscriptions and trims costs.
Financials
Source: Stock Analysis
Broadcom’s revenue climbed from $51.6 billion in FY24 to $63.9 billion in FY25, and trailing twelve-month sales now sit at $75.5 billion, up 32.3% year over year.
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Margins are excellent and steady. Gross margin runs 68.3%, operating margin 43.4%, and EBITDA margin 55.0%.
Cash generation is the standout. Broadcom produced $32.8 billion in free cash flow over the past year, a 43.4% free cash flow margin.
That easily covers the $2.54 per share dividend with room to spare for buybacks.
Interest expense of $3.1 billion a year reflects the debt taken on for VMware. With this much cash flow, coverage is no concern.
Valuation
Source: Seeking Alpha
Broadcom trades at 66.0x trailing GAAP earnings and 48.8x non-GAAP earnings, richer than NVIDIA (NVDA) at 35.7x and Micron (MU) at 43.3x.
It looks cheaper next to Advanced Micro Devices (AMD) at 107.1x and Marvell (MRVL) at 95.3x, both of which carry far thinner profits.
On price-to-cash flow, Broadcom sits at 55.9x, above NVIDIA’s 40.2x and Micron’s 34.9x but below AMD and Marvell.
Its forward PEG of 0.7 suggests the growth helps justify the premium.
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Continued…
Growth
Source: Seeking Alpha
Broadcom grew revenue 32.3% over the past year, with a forward estimate of 49.0%.
That trails NVIDIA at 70.7% and Micron at 85.6%, but edges out AMD at 35.0% and Marvell at 34.1%.
Diluted EPS growth of 119.1% leads the group, reflecting the operating leverage in its model.
Free cash flow has compounded at 25.8% over three years, still healthy at this scale.
Profitability
Source: Seeking Alpha
This is where Broadcom shines. Its 76.3% gross margin tops the entire peer set, including NVIDIA’s 74.2%.
Net income margin of 38.9% lands second behind NVIDIA’s 62.9%, well ahead of AMD’s 13.4%.
The levered free cash flow margin of 36.1% is the best on the list, beating NVIDIA’s 18.3% by a wide margin.
Return on equity of 37.3% rounds out a profile few chipmakers can match.
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Our Opinion 7/10
Broadcom is a high-quality compounder riding one of the strongest tailwinds in tech.
The AI franchise, fat margins, and torrential cash flow are hard to argue with, and the dividend adds a layer of return most peers can’t offer.
The catch is price. At 66.0x earnings and 55.9x cash flow, a lot of good news is already baked in.
Custom AI revenue also leans on a few large customers, so any spending pullback would hit hard.
We like the business and would own it for the long haul. But we’d prefer to add on weakness rather than chase it here.
Contact:
Editor@IPO-Edge.com
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