Share prices of Broadcom (NASDAQ: AVGO) initially soared on March 6 after the chipmaker saw robust artificial intelligence (AI) revenue growth in its fiscal 2025 first quarter (ended Feb. 2) and management continued to tout the company's custom AI chip opportunity. Since then, the stock has given back much of its early gains amid the general market malaise. The stock is now down about 21% on the year as of this writing.
Let's take a closer look at Broadcom's recently reported results and the custom AI chip opportunity management is pointing out to see if this is a good buying opportunity for investors.
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Broadcom specializes in custom chips
CEO Hock Tan got investors excited in December 2024 when he talked about Broadcom's big custom AI chip opportunity with the company's three largest customers. He reiterated that these three "hyperscale customers" (meaning they operate huge data centers) were planning to deploy 1 million AI chip clusters in fiscal year 2027, representing a $60 billion to $90 billion addressable market when including chips and networking equipment for that year alone. Broadcom is currently at around a $16 billion AI revenue annual run rate, so this future opportunity is pretty enormous.
Meanwhile, Broadcom said it was actively involved with four other hyperscale companies to develop AI chips. That's up from two last quarter. These four companies are not included in its $60 billion to $90 billion fiscal year 2027 addressable market. It took about 15 months for Broadcom's first custom AI chip customer, Alphabet, to go from designing its custom AI chips to deploying them, which was considered fast.
AI once again helped power Broadcom's results in fiscal Q1, with its AI-related revenue soaring 77% to $4.1 billion. Total semiconductor solutions revenue increased 11% year over year to $8.2 billion, as the recovery in its non-AI chip revenue remains sluggish.
Infrastructure software revenue, meanwhile, climbed 47% to $6.7 billion. The company attributed this strong growth to transitioning customers from perpetual licenses to subscriptions for VMware, as well as upselling customers to its full solution, which allows the entire data center to be virtualized. It noted that 60% of its VMware customers are now on subscriptions and that 70% of its 10,000 largest customers were now using its full VMware Cloud Foundation (FCF) stack. The segment also saw an uplift from deals being pushed into fiscal Q1 from fiscal Q4.
Overall company revenue jumped 25% to $14.92 billion in the quarter, while adjusted earnings per share (EPS) soared 45% to $1.60 (adjusting for its prior 10-for-1 stock split). The results topped analyst expectations for adjusted EPS of $1.49 on revenue of $14.61 billion, as compiled by the LSEG. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, jumped 41% year over year to $10.1 billion.
Broadcom continues to produce robust cash flow, with cash flow from operations coming in at $6.1 billion and free cash flow of $6 billion. It ended the quarter with nearly $9.3 billion in cash and equivalents, and $66.6 billion in debt. Its debt is a result of its prior $69 billion acquisition of VMware.
Broadcom management forecasted fiscal Q2 revenue to increase by 19% to $14.9 billion, with semiconductor revenue climbing 17% to $8.4 billion and infrastructure software revenue jumping 23% to $6.5 billion. It projected AI revenue to increase by 44% to $4.4 billion, led by a steady ramp-up in deployment of its AI chips and networking products. It expects adjusted EBITDA to be about 66% of revenue, or about $9.8 billion.
Image source: Getty Images.
Is now a good time to buy Broadcom stock?
Broadcom management continues to have a very upbeat outlook for the potential of its custom AI chips. While it is not going to get all the addressable market it sees from its three largest customers (Nvidia's graphics processing units (GPUs) will get their fair share), this is still a big opportunity. Custom AI chips, or ASICs (application-specific integrated circuits), can outperform GPUs for the very specific tasks for which they are designed and help reduce costs. However, they do not have the flexibility of GPUs, which can be used for a broader range of tasks.
The addition of two new AI chip customers, bringing its total number of customer AI chip customers to seven, meanwhile, is a big win for the company. Meaningful revenue from these customers will take time to materialize, but it should lead to nice growth in later years. At the same time, Broadcom continues to see good traction with its VMware software business, as it upsells and moves customers to subscriptions and its VFM solution. Its more cyclical chip business continues to struggle, but an eventual rebound would be another boost.
Broadcom now trades at a forward price-to-earnings (P/E) ratio of about 29.5 based on fiscal 2026 analyst estimates.
Data by YCharts.
If Broadcom can capitalize on its AI opportunities, then its current valuation looks pretty attractive. Its increasing number of custom AI chip customers is a great sign as companies turn more to custom solutions to lower costs and improve performance of specific. While custom chips aren't going to replace mass-merchant GPUs, just carving a solid alternative niche is still a huge opportunity.
As such, I think Broadcom is a good option to buy at current levels.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
