Broadcom’s Stock Decline Presents Investment Opportunities Amid Market Fluctuations

Broadcom (AVGO) shares have plummeted 17.3% year-to-date (YTD). This decline is largely due to a broad sell-off in technology stocks fueled by increasing recession fears. The situation worsened following U.S. President Donald Trump’s imposition of tariffs on key trading partners, including China, Mexico, and Canada, igniting concerns of a potential trade war. As a company that relies on international markets for vital components, Broadcom remains susceptible to these geopolitical tensions.

Nevertheless, this drop may present a significant opportunity for investors to purchase shares of Broadcom. Growth-focused investors might want to overlook the short-term setbacks that stem from market dynamics, as Broadcom maintains an impressive portfolio, strong VMware business, solid balance sheet, and robust free cash flow generation. Let’s explore further.

AVGO Stock Performance Overview

 

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Strong Portfolio Enhancing Broadcom’s Growth Potential

Broadcom benefits from solid demand for its application-specific integrated chips (ASICs), which are tailored to enhance AI and machine learning capabilities. Major clients such as Alphabet (GOOGL) and Meta Platforms (META) utilize Broadcom’s ASICs. The necessity for custom AI accelerators (XPUs)—a subtype of ASICs—for training advanced Generative Artificial Intelligence (GenAI) models further contributes to the company’s revenue. These accelerators require precise integration of compute, memory, and I/O functionalities, which promotes efficient performance while minimizing power use and costs.

An exciting addition to Broadcom’s offerings includes the launch of the industry’s first Face-to-Face (F2F) 3.5D XPUs. This technology merges 3D silicon stacking with 2.5D packaging, yielding remarkable improvements in interconnect density and power efficiency. Specifically, F2F boasts a sevenfold increase in signal density and a tenfold decrease in power consumption for die-to-die interfaces compared to traditional Face-to-Back techniques.

Broadcom’s cutting-edge portfolio serves as a strong growth catalyst. The company’s next-generation 3-nanometer XPUs are unique in the current market and are expected to commence volume shipments to major customers in the second half of fiscal 2025. Additionally, they aim to develop the first 2-nanometer AI XPU featuring 3.5D packaging, targeting a scaling initiative for 500,000 accelerators designed for hyperscale users.

Broadcom foresees vast opportunities in the AI market, as three of its hyperscale customers are developing proprietary XPUs. By 2027, each intends to deploy 1 million XPU clusters within a single framework. The serviceable addressable market for XPUs and networking could range from $60 billion to $90 billion in fiscal 2027. Moreover, Broadcom has recently expanded its client base by partnering with four additional hyperscalers.

A robust partner ecosystem—including industry leaders like NVIDIA (NVDA), Arista Networks, Dell, Juniper, and Supermicro—further underscores Broadcom’s growth trajectory. With expectations for a 44% year-over-year surge in AI revenues to $4.4 billion and a 17% increase in semiconductor revenues to $14.9 billion for the second quarter of fiscal 2025, the company is positioned for strong performance.

VMware Acquisition Fuels Broadcom’s Infrastructure Software Growth

Broadcom’s acquisition of VMware has significantly driven its Infrastructure Software (ISG) revenues, which soared 47% year-over-year to $6.7 billion, contributing 45% to first-quarter fiscal 2025 revenues. A shift from perpetual licensing of vSphere to a subscription model (60% complete) has accelerated growth.

The strategy to provide a comprehensive Virtual Cloud Foundation (VCF) is also enhancing customer adoption. Currently, 70% of the largest 10,000 customers have embraced VCF by the end of the fiscal first quarter. Collaborating with NVIDIA, Broadcom has secured 39 enterprises participating in the VMware Private AI Foundation, leveraging AVGO’s open ecosystem and automation capacity to optimize workloads between GPU and CPU infrastructures.

In the second quarter of fiscal 2025, Broadcom anticipates ISG revenues to rise 23% year over year, reaching $6.5 billion.

Strong Financial Position and Cash Flow Support Broadcom’s Growth Outlook

Broadcom’s formidable balance sheet and cash flow generation capabilities bolster its growth. As of February 2, 2025, the company reported cash and cash equivalents of $9.31 billion, alongside $6.11 billion in operational cash flow. Its free cash flow amounted to $6.01 billion, representing 40% of revenue at the end of the first fiscal quarter of 2025.

This strong financial footing enables Broadcom to consistently pay dividends and execute share buybacks. In the first quarter of fiscal 2025, the company returned $2.8 billion to shareholders in dividend payments.

Rising Earnings Estimates Signal Positive Outlook for AVGO

The Zacks Consensus Estimate for fiscal 2025 earnings stands at $6.56 per share, reflecting a 4% increase over the past 30 days, which suggests a 34.7% growth year-over-year. For the second quarter of fiscal 2025, the consensus earnings estimate is $1.56 per share, marking a 5.4% increase over the same period, indicating a 41.82% rise year-over-year.

Broadcom has consistently exceeded the Zacks Consensus Estimate throughout the last four quarters, with an average earnings surprise of 3.44%.

Broadcom Inc. Price and Consensus Chart

Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote

 

Explore the latest EPS estimates and surprises on Zacks earnings Calendar.

AVGO Shares Trading at a Premium Valuation

Currently, AVGO shares may appear expensive, with a Value Score of F suggesting a stretched valuation. The forward 12-month Price/Sales ratio stands at 13.73X, surpassing its median of 13.39X and the sector average of 5.78X.

Price/Sales Ratio (F12M)

 

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Conclusion: Strategic Growth Justifies Broadcom’s Premium Valuation

Broadcom’s expanding AI capabilities and extensive partner network underscore its significant growth prospects. These factors collectively warrant the stock’s premium valuation.

With a current Zacks Rank of #1 (Strong Buy) and a Growth Score of B, Broadcom presents a compelling investment opportunity according to Zacks Proprietary methodology. You can view the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.