After Earnings, Is Broadcom Stock a Buy, a Sell, or Fairly Valued?

Broadcom AVGO released its fiscal second-quarter earnings report on June 5. Here’s Morningstar’s take on Broadcom’s earnings and stock.

Key Morningstar Metrics for Broadcom

• Fair Value Estimate: $225.00
• Morningstar Rating: ★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Broadcom’s Earnings

Broadcom’s April-quarter revenue rose 20% year over year and 1% sequentially to $15.0 billion, while artificial intelligence chip revenue rose 46% year over year and 9% sequentially to $4.4 billion. July-quarter guidance includes close to 60% year-over-year AI chip revenue growth to $5.1 billion.

Why it matters: AI continues to drive impressive growth for Broadcom. Guidance surpassed our estimates, and management implied close to 60% growth for AI chip sales in fiscal 2026. We now expect Broadcom to hit $50 billion in AI revenue in fiscal 2027, up from $12 billion in fiscal 2024.

• We liked hearing that Broadcom is now seeing inference demand on the horizon for its accelerator customers, which could provide further upside to the firm’s fiscal 2027 training-centric targets. We also remain impressed with the growth of networking chips into AI alongside custom accelerators.
• VMware remains the firm’s second-largest growth driver, rising more than 60% year over year by our estimates. This impressive growth since the acquisition reflects the successful upselling of customers to the VMware Cloud Foundation full-stack solution, in our view.

The bottom line: We raise our fair value estimate for wide-moat Broadcom to $225 per share from $200, as we raise our medium-term AI chip revenue forecast. Shares dipped 5% in after-hours trading, in our view, reflecting optimism already priced into the stock and only a modest beat to consensus estimates.

• We now model Broadcom to hit the middle of its fiscal 2027 AI revenue target range, and growth has consistently beaten our model this year. There are upside and downside risks to this range, chiefly customer spending patterns and the potential onboarding of new custom accelerator customers.
• We continue to see shares as overvalued and implying Broadcom hitting the upper end of its fiscal 2027 target range. To us, this implies close to 75% AI chip growth in fiscal 2026 and 2027, compared with our own forecast for 60% growth.

Fair Value Estimate for Broadcom

With its 3-star rating, we believe Broadcom stock is fairly valued compared with our long-term fair value estimate of $225 per share. Our valuation implies a fiscal 2025 adjusted price/ earnings multiple of 34 times and a fiscal 2025 enterprise value/sales multiple of 17 times.

In our view, Broadcom’s primary valuation drivers are the growth of its AI chip business and its ability to extract growth and operating leverage from VMware. We also anticipate continued inorganic growth over the long term. We model 20% revenue growth for Broadcom through fiscal 2029. We see high artificial intelligence sales driving supernormal growth in the next five years, but for longer-term durable growth to settle around 10% on an organic basis.

Read more about Broadcom’s fair value estimate.

Economic Moat Rating

We believe Broadcom holds a wide economic moat, stemming from intangible assets in chip design and switching costs for its software products. Broadcom’s strength in both chips and software allow it to earn terrific accounting and economic profits, and we believe its competitive positioning will allow it to do so for the next 20 years. While we see most of Broadcom’s businesses as moaty in isolation, we believe its ability to aggregate disparate businesses via acquisitions and run them with terrific efficiency reinforces its wide moat. We see this wide moat evidenced in starkly impressive operating and economic profit margins.

The majority of Broadcom’s business is in semiconductors, with broad end market exposure across enterprise networking, wireless chips for smartphones, broadband access, and storage applications. We see the two largest exposures here, networking and wireless chips, as benefiting from wide-moat design expertise in chip design.

Read more about Broadcom’s economic moat.

Financial Strength

We anticipate Broadcom focusing on strong cash generation. Over the short term, we expect the firm to focus on paying down debt taken out to acquire VMware. Over the long term we expect the focus to be on growing its dividend and bolting on more acquisitions by which to add to its cash flow. As of October 2024, Broadcom held $9 billion in cash and equivalents versus $68 billion in gross debt, with approximately half of that taken on to finance the 2023 acquisition of VMware. We don’t worry about its debt load, given the long-dated nature of its outstanding notes and its robust cash generation.

Read more about Broadcom’s financial strength.

Risk and Uncertainty

We assign a High Uncertainty Rating to Broadcom. As a chipmaker, the firm is vulnerable to market supply and demand cycles. Though it has been able to offset cyclicality in recent years with its software exposure and networking strength as a buoy, future cycles may not look similar. It also operates with a high reliance on TSMC for its chip supply, and supply constraints could hamper its ability to ship to customers in the future. Nonetheless, we believe Broadcom is a preferred customer of TSMC and would earn high priority in such a scenario—both for its scale and lengthy relationship.

We believe there is key man risk with CEO Hock Tan, who is in his 70s. Tan has been integral to Broadcom’s acquisition and operating strategy, and new management may fail to realize the impressive efficiencies of the current team. Even with Tan at the helm, Broadcom’s reliance on acquisitions is risky.

Read more about Broadcom’s risk and uncertainty.

AVGO Bulls Say

• Broadcom is a poster child for operating efficiency. It earns excellent operating margins and generates enormous cash flow. It is particularly strong at acquiring companies and trimming excess expenses.
• Broadcom’s networking and wireless chip businesses boast best-of-breed technologies in our view, along with marquee customer relationships with Apple, Google, Cisco, Arista, and others.
• We believe Broadcom will be a significant beneficiary of rising artificial intelligence spending, which we expect to spur significant growth for its networking semiconductor sales.

AVGO Bears Say

• Broadcom’s chip business is prone to cyclicality and customer concentration, with a small handful of wireless and AI customers becoming a rising portion of revenue.
• Broadcom’s software portfolio holds legacy and mature businesses, like virtualization and mainframes, which we think will exhibit moderating growth.
• Broadcom relies heavily on acquisitions to expand its portfolio and may struggle to find deals large enough to move the needle that can pass antitrust scrutiny.

This article was compiled by Gautami Thombare.