We came across a bullish thesis on Broadcom Inc. (AVGO) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on AVGO. Broadcom Inc. (AVGO)’s share was trading at $195.54 as of March 14th. AVGO’s trailing and forward P/E were 90.53 and 30.03 respectively according to Yahoo Finance.
An exterior view of a busy data centre, showing the scale and workflows of the company.
Broadcom’s fiscal Q1 results solidified its position as a top performer in the tech sector, with AI-driven demand propelling revenue and margins to record highs. The company posted $14.9 billion in revenue, up 25% year-over-year, surpassing consensus estimates by $330 million. AI-related revenue was a standout, surging 77% to $4.1 billion, as hyperscaler demand for Broadcom’s networking solutions remained strong. This surge underscores Broadcom’s critical role in the AI supply chain, with hyperscalers aggressively investing in data center capacity to support expanding AI workloads. Management emphasized the company’s irreplaceable position in AI infrastructure, reinforcing its long-term competitive edge.
Semiconductor revenue reached $8.2 billion, growing 11% year-over-year despite a 9% sequential decline in non-AI semiconductor sales due to seasonal trends. Infrastructure software revenue surged 47% to $6.7 billion, driven by VMware’s contribution and Broadcom’s successful transition from perpetual licenses to full subscriptions. The swift integration of VMware significantly boosted profitability, with software gross margins hitting 92.5% and operating margins rising 17 percentage points to 76%. This operational efficiency contributed to an all-time high EBITDA margin of 67.6%, reflecting Broadcom’s strong execution.
The company’s ability to generate substantial free cash flow remains unmatched, with Q1 adjusted EBITDA reaching a record $10.1 billion, representing a 68% margin. Even with VMware-related debt, Broadcom generated $6 billion in free cash flow at a 40% margin. Management expects this figure to improve toward 50% as debt expenses normalize. Broadcom’s cash flow strength enabled it to reduce net debt by $1.1 billion in Q1, while also returning $2.8 billion to shareholders through dividends and executing $2 billion in share buybacks. The dividend remains well-supported, growing at a 14% compound annual rate with a conservative 42% payout ratio.
Despite Broadcom’s impressive AI-driven growth, the company’s reliance on a handful of hyperscaler customers introduces risk. Any disruption in their spending could impact Broadcom’s outlook, justifying some investor caution. However, Broadcom’s deep integration with hyperscalers and best-in-class networking solutions make customer defection unlikely in the near term. Looking ahead, Broadcom aims to scale AI clusters to 500,000 accelerators, further entrenching its leadership in AI networking.
Broadcom’s balance sheet remains a point of concern, but its ability to generate $20-$30 billion in annual free cash flow means it could eliminate its debt burden within a few years if necessary. Given its unmatched profitability, AI-related product leadership, and efficient VMware integration, Broadcom remains a compelling long-term investment. While its stock trades at a premium, its strong growth prospects and disciplined capital allocation justify its valuation.
Despite these strengths, Broadcom’s stock has underperformed recently, creating an attractive entry point. Shares surged 8.5% after earnings but remain down 16% from late 2024 levels, trading below the previously targeted buy range of $200-$210. This pullback has made shares more affordable, even as revenue and earnings expectations have increased. While concerns exist over hyperscalers potentially moderating cloud infrastructure investments, Broadcom’s deep customer relationships and continued expansion provide strong visibility into future demand.
At a share price below $200, Broadcom trades at roughly 30x fiscal 2025 earnings, down from 34x in December. Its growth-adjusted PEG ratio of 1.3x represents a 20% discount to the semiconductor sector median. With a projected 22% EPS CAGR over the next four years, shares offer significant upside. Assuming AI-driven growth remains intact, a reasonable 28x earnings multiple suggests a fair target price of $263 per share, implying annualized returns of approximately 11.5%, or 13% including dividends. This presents a highly attractive risk-reward profile, positioning Broadcom as a long-term outperformer against global benchmarks.
Broadcom Inc. (AVGO) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 161 hedge fund portfolios held AVGO at the end of the fourth quarter which was 128 in the previous quarter. While we acknowledge the risk and potential of AVGO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.