Key Points
As artificial intelligence (AI) revenue accelerates and the stock experiences a recent lull, Broadcom (NASDAQ: AVGO) emerges as a highly compelling investment within the AI infrastructure sector. This global designer, developer, manufacturer, and supplier of semiconductor products is positioned for exponential expansion, with AI revenue expected to double to $115 billion in fiscal 2027—up from an earlier estimate of $100 billion—and then double again to $230 billion in fiscal 2028.
An examination of Broadcom’s recent performance and outlook reveals why the semiconductor company represents a compelling opportunity at current valuations.
Image source: The Motley Fool.
Custom chips lead the way
Broadcom’s AI semiconductor revenue surged 221% year over year in fiscal Q3, which ended on Aug. 2. During this period, the company delivered mass shipments of Ironwood TPU v7 chips to both Alphabet and Anthropic and commenced shipping Alphabet’s next-generation Tensor Processing Units (TPUs) v8i. Broadcom noted it is managing the inference version of Alphabet’s TPU 8i, while MediaTek handles the training-focused v8t version. Notably, Broadcom brought the 8i version to market more swiftly than MediaTek despite a later start.
The most significant development, however, was the company’s revised outlook. The $230 billion AI revenue estimate for fiscal 2028 substantially exceeded the $180 billion previously projected by Citigroup analysts. Furthermore, management indicated that its AI networking segment would grow at a pace equal to its custom chip business.
The company detailed the sources of this revenue, stating that Anthropic will become its largest customer next fiscal year, with the frontier lab planning to deploy 5 gigawatts of TPU version 8i in fiscal 2027 and 10 gigawatts in fiscal 2028. Alphabet will remain a crucial customer, generating tens of billions of dollars in TPU revenue annually in the coming years.
Meanwhile, OpenAI is projected to become the second-largest chip customer, with 5 gigawatts of its new Jalapeño chip and its successor expected to be deployed in 2028. Broadcom will also supply Meta Platforms with 3 gigawatts of its custom MTIA chips through 2028, spanning three generations.
Broadcom highlighted that fiscal 2027 AI revenue could surpass its $115 billion projection due to current demand exceeding expectations, though supply constraints need to be addressed. For 2028, however, the company has secured sufficient supply to meet its outlook. Driven by massive AI revenue growth over the next two years, Broadcom now anticipates adjusted EPS exceeding $30 in fiscal 2028.
Looking at fiscal Q3 results, Broadcom’s overall revenue climbed 86% year over year to $29.6 billion, while adjusted earnings per share (EPS) jumped 96% to $3.32. These figures surpassed analyst expectations of adjusted EPS of $3.24 and revenue of $29.36 billion, according to LSEG.
Total semiconductor solutions revenue soared 127% year over year to $20.8 billion. Conversely, non-AI chip revenue growth remained sluggish, increasing just 5% to $4.2 billion for the quarter. Infrastructure software revenue, meanwhile, grew 29% to $8.8 billion.
Overall gross margin came in at 75%, declining 210 basis points as semiconductor revenue constitutes a larger share of the total. Software gross margin stood at 84%, compared with 76% for the semiconductor segment.
Looking forward, Broadcom forecasts fiscal Q4 revenue to grow by 93% to $34.8 billion, with AI revenue surging 236% to $21.6 billion. Gross margin is expected to be 73%.
Time to buy the stock?
Broadcom is experiencing surging revenue while effectively diversifying its AI chip customer base. Despite these strengths, the stock currently trades at a forward price-to-earnings (P/E) ratio of 11.5 times the fiscal 2028 guidance it just provided. This valuation is remarkably inexpensive for what is rapidly becoming one of the premier growth stocks in the AI infrastructure space.
Consequently, the stock represents a strong buying opportunity during this dip.
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