Broadcom (AVGO) delivered a solid second-quarter earnings report, driven by soaring demand for artificial intelligence infrastructure.
Yet, despite record sales and impressive AI revenue growth, shares of the semiconductor and software giant dipped, as Wall Street weighed high expectations against only modest outperformance.
AI Drives Record Sales, But Investors Wanted More
Broadcom’s second-quarter revenue jumped 20% year over year, hitting $15 billion—a new company record and just above guidance. Fueling the rise was a 46% surge in AI semiconductor revenue, which climbed to $4.4 billion. Custom accelerators and networking gear, such as Broadcom’s Tomahawk switches and Jericho routers, were in especially high demand among hyperscalers like Google (GOOG), Meta (META), and Apple (NVDA).
CEO Hock Tan pointed to this strong performance as proof of Broadcom’s vital role in the AI supply chain. AI networking revenue alone jumped over 170% year over year and accounted for 40% of Broadcom’s AI business, a testament to the firm’s edge in delivering the infrastructure behind modern AI clusters.
Still, the market reaction was tepid. Shares fell 3.4% Friday to around $251, with some investors cashing in after a massive 85% gain over the past year. Analysts cited the absence of a major upside surprise—and comparisons to Nvidia’s blockbuster report last week—as reasons behind the dip.
Not Just Chips: The Complex Case of Broadcom’s Business Model
While Broadcom is a top-tier supplier in the AI boom, it’s not a pure play. The company’s business spans from semiconductors to infrastructure software, including legacy technologies like mainframes and VMware virtualization tools. This diversification provides stability—software revenues rose 25% to $6.6 billion—but also muddies the investment thesis for those seeking a focused AI bet.
“Broadcom is a confusing company for AI-focused investors,” said Kimberly Forest, CIO at Boca Capital Partners. “It’s not the clean AI play like Nvidia. The chip business is important but relatively small compared to the whole.” Forest noted that spinning off the AI segment could help showcase its growth potential more clearly.
Still, Broadcom’s ability to generate consistent free cash flow—$6.4 billion in the second quarter, up 44% year over year—speaks to its financial strength. Its trailing 12-month FCF now totals $22.7 billion, nearly double its reported net income. Despite a lofty valuation, some analysts argue this cash generation justifies the price tag.
While Broadcom is a top-tier supplier in the AI boom, it’s not a pure play. The company’s business spans from semiconductors to infrastructure software, including legacy technologies like mainframes and VMware virtualization tools. This diversification provides stability—software revenues rose 25% to $6.6 billion—but also muddies the investment thesis for those seeking a focused AI bet.
“Broadcom is a confusing company for AI-focused investors,” said Kimberly Forest, CIO at Boca Capital Partners. “It’s not the clean AI play like Nvidia. The chip business is important but relatively small compared to the whole.” Forest noted that spinning off the AI segment could help showcase its growth potential more clearly.
Still, Broadcom’s ability to generate consistent free cash flow—$6.4 billion in the second quarter, up 44% year over year—speaks to its financial strength. Its trailing 12-month FCF now totals $22.7 billion, nearly double its reported net income. Despite a lofty valuation, some analysts argue this cash generation justifies the price tag.
Looking Ahead: Inference Demand and Analyst Optimism
Looking to the third quarter, Broadcom expects AI revenue to grow 60% year over year to $5.1 billion, supported by increased investment in inference—teaching AI models how to deliver answers and make decisions. Tan emphasized that major clients remain committed, with many “doubling down” on infrastructure even in a cloudy macro environment.
The company sees its addressable market for AI processors and networking chips swelling to as much as $90 billion by 2027, driven by a wave of deployments from hyperscalers—some of whom plan to launch million-chip clusters for frontier AI training.
Despite some disappointment from investors, analysts are still bullish. Morgan Stanley raised its price target to $270, while BofA and Benchmark lifted theirs to $300 and $315, respectively. Benchmark’s Cody Acree called Broadcom “uniquely situated” to benefit from custom silicon demand and accelerating inferencing applications.
Conclusion
Broadcom’s Q2 results may have fallen just short of Wall Street’s sky-high expectations, but the company’s fundamentals remain strong. Its leadership in AI infrastructure, growing free cash flow, and long-term prospects position it as a critical—if complex—player in the ongoing AI revolution. Investors seeking a stable, diversified exposure to the sector may still find Broadcom a compelling option, even if the headlines didn’t dazzle this time.
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