In This Article:
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Broadcom shares fell despite another strong quarter of AI revenue growth.
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However, its CEO got defensive when asked about the AI market opportunity he touted only six months ago.
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Still, the company is only at the beginning of its custom AI chip opportunity.
Broadcom (NASDAQ: AVGO) once again reported robust artificial intelligence (AI) revenue growth in its fiscal second-quarter results released this week, with promises that the strong revenue growth would continue. The stock slipped despite an upbeat outlook, although it remains up more than 75% over the past year.
Let's take a closer look at Broadcom's most recent results and the AI opportunity in front of it to see whether investors should buy this small dip.
Broadcom CEO Hock Tan initially got investors excited back in December 2024 when he talked about the company having a $60 billion to $90 billion serviceable addressable market (SAM) opportunity in fiscal year 2027 with its three largest hyperscale (meaning they operate huge data centers) customers. However, when asked whether its SAM had increased, Tan told analysts he's "not playing the SAM game" and to "stop talking about SAM now."
It was an unusual and defensive response from an executive who, only six months ago, was hyping Broadcom's SAM opportunity. However, Tan had said earlier that he anticipates Broadcom's current AI semiconductor revenue growth to sustain into fiscal 2026 after projecting it would grow by 60% to $5.1 billion in fiscal Q3. As one analyst on the call pointed out, that would imply $30 billion or more in AI semiconductor revenue in fiscal 2026.
Much of Broadcom's AI semiconductor revenue growth is currently coming from its networking portfolio, particularly Ethernet switches. The company said its AI networking revenue surged by 170% year over year and represented 40% of its AI revenue.
Perhaps, the bigger opportunity, though, is in custom AI chips. The company stated that custom AI chip revenue rose by double digits in the quarter and that it expects demand in the back half of 2026 to accelerate as inference demand surges. This is most likely coming from Alphabet, which was Broadcom's first customer for custom AI chips. However, the company said it still expects its three largest custom chip customers to each deploy 1 million AI chip clusters in 2027, mostly for training foundational AI models.
Turning to Broadcom's results, its overall revenue climbed 20% year over year to $15 billion in the quarter, while adjusted earnings per share (EPS) soared 44% to $1.58 (adjusting for its prior 10-for-1 stock split). The results edged past analyst expectations for adjusted EPS of $1.56 on revenue of $14.99 billion, as compiled by LSEG. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, surged 67% year over year to $10 billion.