AI and 5G Bestow Premium Price Tag on Broadcom Stock (AVGO)

Business Insider

5 hours ago

Wall Street remains enamored with global semiconductor giant Broadcom (AVGO), as the stock reaches fresh all-time highs and, to many, creates a self-fulfilling prophecy. The trillion-dollar semiconductor giant is posting record revenues, fueled by surging demand for its AI chips, which in turn translates into further investor interest and increased exposure — a virtuous cycle as far as AVGO investors are concerned.
Don't Miss TipRanks' Half-Year Sale
Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
Make smarter investment decisions with TipRanks' Smart Investor Picks, delivered to your inbox every week.
Broadcom's expanding footprint in AI infrastructure—alongside its key role in next-generation technologies like 5G—keeps me bullish on the stock, despite its lofty valuation, which has seen AVGO's P/E ratio balloon to 99.5. When compared to the IT sector mean of ~30, it's understandable why worries about AVGO's valuation would be surfacing.
AI Semiconductor Growth Soars
Broadcom's AI semiconductor business continues to demonstrate strong growth. In its fiscal second quarter of 2025, revenue from the company's Semiconductor Solutions segment increased 17% year-over-year, reaching $8.4 billion, marking nine consecutive quarters of growth in AI-related products. Within this segment, AI semiconductor revenue rose to $4.4 billion, and Broadcom anticipates this figure will grow to $5.1 billion in the fiscal third quarter.
This performance reflects sustained demand from hyperscale customers, such as Meta Platforms (META), for Broadcom's custom application-specific integrated circuits (ASICs) and high-performance Ethernet-based networking solutions. In addition to top-line growth, Broadcom is also achieving improved profitability. Over the past two quarters, gross profit margins have increased to 78%, up from the low-to-mid 70% range observed in prior periods.
This margin expansion is primarily driven by the integration of VMware, whose infrastructure software has supported Broadcom's transition to a subscription-based revenue model. Furthermore, the company's specialized and highly customizable ASICs provide meaningful pricing power, reinforcing Broadcom's competitive position in the AI infrastructure space.
Broadcom's ASICs Represent AI's Nervous System
For those less familiar, Broadcom has long held a leadership position in networking and connectivity technologies. Its application-specific integrated circuits (ASICs) play a critical role in optimizing the performance of large language models (LLMs) by enabling efficient and high-speed data transfer.
While Nvidia's (NVDA) GPUs handle the intensive computational workloads, Broadcom's ASICs ensure the smooth and rapid movement of data to and from these AI accelerators. In essence, if Nvidia's GPUs are the 'brains' of AI processing, Broadcom's ASICs serve as the 'nervous system,' facilitating the seamless data flow required for peak performance. Without this foundational infrastructure, GPUs would be unable to operate at their full potential.
Beyond its advancements in AI, Broadcom is also making notable strides in 5G technology. The company's chipsets, designed specifically for 5G infrastructure, support faster, more reliable wireless connectivity. Broadcom offers a comprehensive end-to-end portfolio of 5G mobile networking switches, built to address the performance and scalability requirements of 5G across the entire network.
As global 5G adoption continues to accelerate, Broadcom is well-positioned to capitalize on this expanding market, which is projected to surpass $100 billion by 2032.
Navigating Tariff Headwinds
Broadcom has also benefited from favorable macroeconomic developments. In late May, the Trump administration announced a delay in the proposed 50% tariff on European Union goods. As the July 9 deadline approaches, reports suggest that the U.S. and EU are making progress toward a deal that could prevent the tariffs altogether.
This is a significant development for Broadcom, whose chips are widely used in devices worldwide. Imposing tariffs on EU goods could lead to higher costs and weaker demand, potentially creating headwinds for the company. A resolution on this front would help mitigate that risk.
Strong Financials, Premium Valuation
Fortunately for Broadcom, its solid financial position provides a cushion against potential cost pressures. As TipRanks data shows, the company holds $9.47 billion in cash and short-term investments and has been steadily reducing its debt, giving it the financial flexibility to navigate rising expenses if needed.
As is often the case with stocks carrying high earnings expectations, AVGO trades at a substantial premium. Its price-to-earnings (P/E) ratio stands at 99.5, well above the IT sector median of 29.38. To be fair, a portion of this premium appears justified: Broadcom is delivering exceptional revenue growth of 33.85% year-over-year, more than five times the sector median of 6.34%, mainly driven by demand for its AI chips.
However, with such lofty expectations baked into the stock, any slowdown in growth could leave it vulnerable to a sharp correction.
Is Broadcom a Buy, Sell, or Hold?
On Wall Street, AVGO boasts a Strong Buy consensus rating, based on 27 Buy, two Hold, and zero Sell ratings over the past three months. AVGO's average stock price target of $293.80 implies an upside potential of ~7% over the next twelve months.
Last month, Morgan Stanley analyst Joseph Moore assigned a Buy rating on AVGO stock with a price target of $270. He expressed optimism regarding Broadcom's growth potential in AI, noting that the 'anticipated acceleration in processor sales and the continued strength in networking are expected to drive future performance.'
Meanwhile, Bank of America analyst Vivek Arya has upped the ante with a price target of $300 alongside his Buy rating. In addition to Broadcom's diverse product portfolio and potential in AI, the analyst lauded the company's 'blend of capital appreciation and consistent dividend growth.'
Broadcom's AI Edge Brings High Expectations
Wall Street's optimistic view on Broadcom (AVGO) appears well-founded. The company is capitalizing on strong macro tailwinds—particularly rising demand for AI—and continues to show solid improvements in its core business fundamentals. The recent delay in proposed EU tariffs has further lifted investor sentiment, helping propel the stock to all-time highs. Broadcom's longstanding leadership in networking technology also positions it as a key player in transformative areas like AI and 5G—an advantage that won't be easily replicated by competitors.
That said, the stock carries its share of risk. Its elevated valuation—reflected in a P/E ratio approaching 100—assumes a high level of continued success. Any unfavorable developments on the trade front, particularly around EU tariffs, could weigh on the stock. Additionally, if demand for AI infrastructure were to slow, Broadcom's growth trajectory could face meaningful pressure.
Overall, given Broadcom's critical role in powering AI infrastructure and its diversified technology portfolio, I remain bullish on AVGO.