Broadcom (AVGO) Stock Surged After Investors Realized its Expertise in AI

Stock (Symbol)

Broadcom (AVGO)

Stock Price

$250

Sector

Data is as of

Expected to Report

Company Description

Broadcom designs, develops and supplies a range of semiconductor and infrastructure software solutions.

It operates through two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions segment includes semiconductor solution product lines, as well as its Internet protocol (IP) licensing.

It provides semiconductor solutions for managing the movement of data in data center, telecom, enterprise and embedded networking applications.

It also provides a variety of radio frequency (RF) semiconductor devices, wireless connectivity solutions and custom touch controllers for the wireless market.

Its infrastructure software segment includes its mainframe, distributed and cyber security solutions, and its fiber channel storage area networking (FC SAN) business.

Its mainframe software provides DevOps, AIOps, Security and Data Management Systems solutions. Source: Refinitiv

Sharek’s Take

Broadcom (AVGO) stock surged from ~$100 to ~$250 during the past year as the company got recognized for its AI superiority. AVGO is making AI chips with less heat that consumer less power than some competitors. Its method for building AI infrastructure is different than NVIDIA’s, as its building a general datacenter product that fits everyone’s needs, using hardware from different manufacturers. Broadcom specializes in energy-efficient AI networks using ASICs instead of power-hungry GPUs. In addition, Broadcom refers to AI accelerators as XPU’s instead of GPUs, focusing on compute memory, I/O precision, and software-optimized packaging for efficient performance. In 2024, AVGO’s AI accelerator revenue (XPUs and Networking) grew 220% from $4 billion to $12 billion. 

Broadcom is a semiconductor and software company that designs thousands of products for home connectivity, cloud data centers, and enterprise businesses. It is a conglomerate that was formed over 50 years of mergers and acquisitions including old-school tech companies AT&T/Bell Labs, Lucent, Hewlett-Packard and its semiconductor division, and younger industry leaders (including Broadcom, LSI, Broadcom Corporation, Brocade, CA Technologies and Symantec). The majority of AVGO’s silicon wafer manufacturing operations are designed in North America or Europe, then outsourced by the company to external foundries in Asia, such as Taiwan Semiconductor.

Broadcom’s method for building AI infrastructure is different, as its building a general product that fits everyone’s needs, with hardware from different manufacturers used in the datacenter:

• Broadcom feels it can make AI networks that are designed specifically for the customer that require less energy. Instead of using GPUs for AI, Broadcom utilizes application-specific integrated circuits, or ASICs, that use less energy.
• Broadcom refers to AI accelerators as XPUs instead of NVIDIA’s GPUs. Aspects os an XPU include:
  • compute (optimizing flow)
  • memory (the correct size, cooling, testing)
  • input/output (chiplets that match precision and ratio for workloads)
  • packaging (coded software to run like a machine)
• Within an AI server, there is essentially a network with 8 to 12 XPUs, ethernet devices, CPUs, and solid state hard drives. (much of this is manufactured by Broadcom already).

AVGO has two business segments:

• Semiconductor Solutions (sales up 12% last qtr, accounted for 59% of total sales):
  This segment offers digital and mixed signal products that use silicon wafers with computer memory. Products include routers, modems, set-top boxes, WiFi-enabled devices, Bluetooth devices, GPS systems, HDD and SSD storage, and motion control encoders. Its competitors include AMD, Cisco, GlobalFoundries, and Qualcomm.
  • Networking (sales +45% year-over-year)
    • Growth was driven by a doubling of its AI XPU shipments to three hyperscale customers and 4x growth in AI connectivity revenue.
    • AI networking revenue jumps 158% year-over-year and accounting for 76% of networking revenue.
  • Wireless (sales +7% year-over-year)
    • Increase was primarily driven by seasonal launch by AVGO’s North American customer.
  • Server/Storage (revenue declined -51% year-over-year)
    • Server storage connectivity revenue has recovered some 20% and management expects revenue to continue to grow.
  • Broadband (sales -51% year-over-year)
    • Management stated that they’ve seen significant orders across multiple service providers during this quarter.
  • Industrial (sales -27% year-over-year)
• Infrastructure Software (sales up 196%, accounted for 41% of total sales):
  This division provides businesses with software to integrate, optimize and secure their operations, including Symantec software that protects organizations from cyber threats. In November 2023, Broadcom acquired VMware, which provides multi-cloud services for all software apps, virtual technology, and x86 server-based computing. The acquisition of VMware took Broadcom’s software segment from around 25% of company revenue to around 45 %.

AVGO stock has an Estimated Long-Term-Growth (LTG) Rate of 20%, but the P/E of 40 makes the stock overvalued by 13%, in my opinion. AVGO also pays a nice dividend of 2%, and management buys back stock. The company has a dividend policy of pacing 50% of the prior-year’s free cash flow to investors. Since 2016, AVGO’s dividend has grown around 20% a year. AVGO is part of the Growth Portfolio and Aggressive Growth Portfolio.

One Year Chart

AVGO stock soared after last qtr’s earnings were released, but management has been explaining how great its AI achievements have been for many months. 

This stock has a 40 P/E this quarter. The P/E was just 26 last quarter as its gone from undervalued to overvalued (in my opinion).

The Est. LTG is 20%, same as last qtr.

Qtrly profit growth was poor around a year ago as AVGO swallowed up the big VMware acquisition. Note profits are expected to climb around 35% the next 2 qtrs. Maybe 40%?

Earnings Table

• Growth was driven by Infrastructure Software segment with +196% growth, which includes recently acquired VMware.
• AVGO’s networking segment saw a 45% increase in revenue with AI networking revenue +158% year-over-year.
• Management continues to drive down spending in VMware

Annual Profit Estimates increased this qtr. 

Qtrly Profit Estimates for the next 4 qtrs are 36%, 35%, 27%, and 22%. These are excellent numbers! For next qtr, analysts expect revenue to grow 22%.

Fair Value

My Fair Value on AVGO is a P/E of 35. The stock has a P/E of 40.

At $250 this quarter, the stock is 13% above my 2025 Fair Value of 218 a share.

Bottom Line

Broadcom (AVGO) has a great looking ten-year chart. Recent success made the shares go parabolic, so its dangerous to take a big position now.

Broadcom is a core holding for AI investors. It’s AI semiconductors are in high demand. I could be wrong, but ts as if AVGO is picking up the low-end AI market share while NVDA is the high-end supplier. On the downside, the stock has gone on a parabolic run making it dangerous to buy here, and the shares seem slightly overvalued. 

AVGO drops from 7th to 9th in the Growth Portfolio Power Rankings.

The stock drops from 4th to 12th in the Aggressive Growth Portfolio Power Rankings. I purchased AVGO for this portfolio last quarter, and the stock has since jumped in price, thus its not the buy it used to be.

Power Rankings

9 of 30

Aggressive Growth Portfolio

12 of 15

Conservative Stock Portfolio

N/A