Will Higher Semiconductor Revenues Help AVGO Stock Beat Q3 Earnings?

Broadcom’s AVGO third-quarter fiscal 2025 results, set to be reported on Sept. 4, are expected to reflect the benefits of expanding AI offerings. AVGO’s Semiconductor segment revenues are anticipated to have benefited from strong demand for custom AI accelerators (XPUs), which are a type of application-specific integrated circuits (ASICs) necessary to train Generative AI models. Alphabet and Meta Platforms are notable users of Broadcom’s ASICs. AI revenues jumped 46% year over year to $4.4 billion in the second quarter of fiscal 2025.

Strong demand for AI networking solutions, which skyrocketed 170% year over year and represented 40% of AI revenues in the second quarter of fiscal 2025, has been a key catalyst. AVGO’s Ethernet-based AI networking enables a single fabric for both scale-out and scale-up architectures and hence is the preferred choice of Broadcom’s hyperscale customers.

Broadcom expects semiconductor revenues to jump 25% year over year to $9.1 billion. AVGO anticipates AI revenues to surge 60% year over year to $5.1 billion. The Zacks Consensus Estimate for Broadcom’s fiscal third-quarter Semiconductor revenues is pegged at $9.114 billion, indicating growth of 25.3% from the figure reported in the year-ago quarter. 

Click here to learn how AVGO’s overall fiscal third-quarter performance is likely to have been.

AVGO’s Infrastructure Software to Benefit From VMware

VMware’s growing traction is expected to have driven the Infrastructure Software segment’s revenue growth in the fiscal third quarter. Broadcom’s focus on shifting VMware products to a subscription-based model and growing adoption of VMware Cloud Foundation (87% of the largest 10,000 customers were shifted by the end of the second quarter of fiscal 2025), which is anticipated to have aided top-line growth in the to-be-reported quarter.

The Zacks Consensus Estimate for Infrastructure Software revenues is pegged at $6.7 billion, indicating 15.6% year-over-year growth.

Lower-Margin XPUs to Hurt AVGO’s Gross Margin

Although Broadcom has been benefiting from higher sales of XPUs, these lower-margin solutions are expected to impact the gross margin negatively. AVGO forecasts the gross margin to decline 130 basis points (bps) sequentially. Broadcom expects an adjusted EBITDA margin of 66% in the fiscal third quarter, suggesting a 70-bps decline on a sequential basis.

The Zacks Consensus Estimate for Semiconductor operating income is pegged at $5.152 billion, indicating 27.5% growth from the figure reported in the year-ago quarter but 7.2% sequential growth.

The consensus mark for Infrastructure Software operating income is pegged at $5.048 billion, implying 29.2% from the figure reported in the year-ago quarter but 1.2% sequential growth.

Zacks Rank and Stocks to Consider

AVGO currently has a Zacks Rank #3 (Hold). 

Astera Labs ALAB, Amphenol APH, and Reddit RDDT are some better-ranked stocks in the broader Zacks Computer and Technology sector. The three stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Astera Labs, Amphenol and Reddit are pegged at 47.8%, 20.6% and 34.9%, respectively. In terms of share price movement, Astera Labs, Amphenol and Reddit have appreciated 31.6%, 57.3% and 34.7%, respectively, outperforming AVGO’s 28.7% year-to-date return.

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

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