Broadcom Stock Fell 3% After Earnings Despite Immense AI Chip Demand

Broadcom released its fiscal third-quarter earnings report on Sept. 2. Here’s Morningstar’s take on Broadcom’s earnings and stock.

Key Morningstar Metrics for Broadcom

• Fair Value Estimate
  : $650.00
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : High

What We Thought of Broadcom’s Fiscal Q3 Earnings

Broadcom’s solid August-quarter results and October-quarter guidance were strong, implying 86% and 93% year-on-year growth, respectively. Management provided bullish guidance through 2028, including artificial intelligence revenue quadrupling from 2026 and non-GAAP EPS nearly tripling to $30.

Why it matters: 2028 guidance beat our model and matches our view that Broadcom’s immense AI chip demand is enduring, if not accelerating, over the next two years. We believe stronger, long-term guidance should help assuage concerns over competitive position and the durability of AI spending.

• Broadcom supplies Google’s eighth-generation inference TPU, which is higher in volume and complexity than the training chip MediaTek won. A multiyear agreement with Google and emphatic guidance match our view that Broadcom’s TPU business isn’t going anywhere soon.
• We expect most of this growth to come from massive ramps to OpenAI and Anthropic, helping diversify Broadcom from Google. Investors may worry about the risk of this frontier-model spending, but we see it supported by improving underlying AI model economics.

The bottom line: We maintain our $650 fair value estimate for wide-moat Broadcom, which remains one of our top picks in semiconductors. Our thesis for massive revenue ramps to OpenAI and Anthropic through 2028 is on track, and shares look like a bargain against this huge impending growth.

• Broadcom shares have fallen nearly 30% since the previous quarter, suggesting the firm may miss its 2028 guidance or that growth will slow thereafter. We see the guidance as credible and believe underlying AI infrastructure demand will continue rising through 2030.
• Management confirmed our expectations that OpenAI and Anthropic will be Broadcom’s two largest customers, starting in 2027. Our call is based primarily on massive expected revenue from these customers, which also drives management’s bullish 2028 outlook.

The following are excerpts from Morningstar’s company report on Broadcom.

Fair Value Estimate for Broadcom

With its 5-star rating, we believe Broadcom stock is significantly undervalued compared with our long-term fair value estimate of $650. Our valuation implies fiscal 2026 (ending October 2026) and fiscal 2027 adjusted price/earnings multiples of 56 times and 34 times, respectively, and a fiscal 2026 enterprise value/sales multiple of 28 times. Against our 2028 earnings estimate, our valuation implies a 22 times multiple. This fits a more normal multiple after a superb period of growth, for a high-quality business we expect to continue growing in the mid to high teens. In our view, Broadcom’s primary valuation driver going forward is the rapid growth of its AI chip business, which supports such high multiples.

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. Strength in both chips and software allows the company to earn terrific accounting and economic profits, and we believe its competitive positioning will allow it to do so, more likely than not, 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 impressive operating and economic profit margins.

Read more about Broadcom’s economic moat.

Financial Strength

We anticipate Broadcom will focus 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 increasing the dividend and bolting on more acquisitions by which to add to cash flow. As of October 2025, Broadcom held $16 billion in cash and equivalents versus $65 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.

After the gross debt/adjusted EBITDA ratio rose to 3.5 times after closing on VMware, the firm exited fiscal 2025 with that figure down to 1.5 times. We see it as appropriately deleveraged exiting fiscal 2025 to begin considering further acquisitions, but anticipate a focus on debt reduction and share buybacks in fiscal 2026. Broadcom consistently generates free cash flow margins above 40%, which we expect to continue. Over the last five years, it’s averaged nearly $20 billion in cash flow annually. We project free cash flow rising past $50 billion annually by fiscal 2027.

Read more about Broadcom’s financial strength.

Risk and Uncertainty

We assign a High Uncertainty Rating to Broadcom. We see its primary risk arising from customer concentration and AI. Broadcom is increasingly concentrated in its AI accelerator business, which is made up of a handful of high-spending customers like Google and Anthropic. Changes in spending patterns from these customers and overall AI demand can create fluctuations in Broadcom’s results and affect market sentiment on its stock. Broadcom’s results and valuation are highly sensitive to the rate of AI investment over the next five years, and within that spending, the secular trend toward custom silicon. Slowdowns in spending, or higher competition from Nvidia and others, are the primary downside risks to results and our valuation.

Broadcom also operates with a high reliance on TSMC for its chip supply, and supply constraints could hamper its ability to ship to customers. 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 a key risk with new management, as CEO Hock Tan has been integral to Broadcom’s acquisition and operating strategy and is contracted with the company through 2030.

On the environmental, social, and governance front, we see little risk for Broadcom, primarily resulting from hard-to-find engineering talent for wireless and networking chips.

Read more about Broadcom’s risk and uncertainty.

AVGO Bulls Say

• Broadcom is best of breed in custom AI accelerators, boasting Google as its largest customer and adding new customers like Anthropic and OpenAI. Rising AI spending portends immense growth.
• Broadcom exemplifies operating efficiency. It earns excellent operating margins and generates enormous cash flow. It is particularly strong at acquiring companies and trimming excess expenses.
• While smaller than its rising AI chip business, Broadcom’s traditional networking chips and VMware software are moaty businesses in their own right that generate good cash flow.

AVGO Bears Say

• Broadcom’s chip business bears significant customer concentration, with a small handful of large AI customers driving the bulk of revenue and future growth.
• 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 Irza Waraich.