AVGO's Infrastructure Software Sales Rise: A Sign of More Upside?

Broadcom’s AVGO Infrastructure Software segment is benefiting from strong demand for VMware solutions. In the third quarter of fiscal 2025, Infrastructure Software revenues jumped 17% year over year to $6.8 billion and accounted for 43% of revenues. Segment gross margin expanded 300 basis points to 93% in the reported quarter. Infrastructure Software operating margin increased from 67% in the year-ago quarter to 77% in the reported quarter, driven by the completion of the VMware integration.

The launch of VMware Cloud Foundation version 9.0 is expected to drive top-line growth over the long term. VCF 9.0 helps enterprises run any application workload, including AI workloads, on virtual machines and on modern containers, making it a real alternative to public cloud. Broadcom has been successful in shifting more than 90% of the top 10,000 accounts from vSphere to the entire vSphere Cloud Foundation virtualization stack.

Broadcom now expects fourth-quarter fiscal 2025 Infrastructure Software revenues to be $6.7 billion, indicating 15% year-over-year growth. AI, along with VMware, is expected to drive top-line growth. AVGO now expects fourth-quarter fiscal 2025 AI revenues to jump 66% year over year to $6.2 billion. Semiconductor revenues are anticipated to grow 30% year over year to $10.7 billion. 

Per our model, Infrastructure Software revenues are expected to increase 15.2% year over year to $6.71 billion. Semiconductor sales are pegged at $10.72 billion, indicating 30.3% growth from the figure reported in the year-ago quarter.

AVGO Faces Tough Competition

Broadcom is facing stiff competition from Microsoft MSFT and Cisco Systems CSCO in the Infrastructure Software domain.

Microsoft expects Azure growth of 37% for first-quarter fiscal 2026. Microsoft's comprehensive AI strategy spans from Azure’s infrastructure to productivity tools like Copilot, which is being integrated across Microsoft 365, Windows 11 and enterprise applications, creating multiple revenue streams and reducing dependence on any single product.

Cisco has been integrating AI into its product portfolios across networking, security, collaboration and observability. Strong demand for Cisco’s products in developing AI infrastructure has been a game-changer for the company. In fiscal 2025, the company received AI infrastructure orders from web-scale customers in excess of $2 billion.

AVGO’s Share Price Performance, Valuation & Estimates

Broadcom shares have appreciated 46.2% year to date, outperforming the broader Zacks Computer and Technology sector’s return of 22.6%.

AVGO Stock’s Performance

The AVGO stock is trading at a premium, with a forward 12-month price/earnings of 38.4X compared with the broader sector’s 29.45X. Broadcom has a Value Score of D.

AVGO Stock’s Valuation

The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $6.71 per share, up by a dime over the past 30 days, suggesting 37.8% growth from fiscal 2024’s reported figure.
 

Broadcom Inc. Price and Consensus

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

Broadcom currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

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