Broadcom Rises 10% Post OpenAI Deal: Buy, Sell or Hold the Stock?

Broadcom AVGO shares jumped 9.88% on Monday to close at $356.70, following the announcement of its deal with OpenAI. The companies are collaborating to develop and deploy 10 gigawatts of custom AI accelerators. 

Under the terms of the agreement, while OpenAI will design the accelerators and systems, Broadcom will develop and manufacture them for large-scale deployment across OpenAI’s facilities and partner data centers. Broadcom and OpenAI have a long-standing relationship involving the co-development and supply of AI accelerators. The companies have now signed a term sheet to deploy racks integrating OpenAI’s custom chips with Broadcom’s networking technologies.

Apart from OpenAI, Broadcom has a rich partner base that includes the likes of Lloyds Banking Group, Walmart, NVIDIA NVDA, Canonical, Arista Networks, Alphabet, Dell Technologies, Meta Platform, Juniper, Supermicro, among others. Broadcom is benefiting from an expanding portfolio, solid VMware business, strong balance sheet and impressive free cash flow. 

Year to date (YTD), Broadcom shares have jumped 23.9%, outperforming the broader Zacks Computer and Technology sector and peers, including NVIDIA, Marvell Technology MRVL and Qualcomm QCOM. While NVIDIA and Qualcomm shares have returned 40.2% and 5.3% YTD, respectively, Marvell Technology shares have dropped 19.1%. The broader sector has returned 22.9%.

AVGO Stock’s Performance

AVGO’s Prospects Ride on Strong Portfolio

Broadcom is benefiting from strong demand for XPUs, which are a type of application-specific integrated circuits (ASICs) necessary to train Generative AI models. They require complex integration of compute, memory, and I/O capabilities to achieve the necessary performance at lower power consumption and cost. Alphabet and Meta Platforms are notable users of Broadcom’s ASICs.

In the third quarter of fiscal 2025, AI revenues surged 63% year over year to $5.2 billion. XPUs accounted for 65% of AI revenues in the reported quarter. Consolidated backlog hit $110 billion, and the company has secured more than $10 billion of orders for AI racks based on XPU demand. AVGO’s networking portfolio is gaining from strong demand for Tomahawk 5 and 6 products, as well as the Jericho 4 Ethernet fabric router. 

AVGO expanded its portfolio with the launch of the industry’s first Wi-Fi 8 silicon solutions for the broadband wireless edge ecosystem, including residential gateways, enterprise access points, and smart mobile clients. Tomahawk 6 – Davisson (TH6-Davisson), the company’s third-generation Co-Packaged Optics (CPO) Ethernet switch, is now being shipped. TH6-Davisson is specifically designed for the accelerating demands of AI networking, as it delivers an unprecedented 102.4 terabits per second of optically enabled switching capacity.

A strong portfolio and rich partner base are expected to drive top-line growth. AVGO expects fourth-quarter fiscal 2025 Semiconductor revenues of $10.7 billion, suggesting 30% year-over-year growth. Infrastructure Software revenues are expected to grow 15% year over year to $6.7 billion.

Strong Liquidity Bodes Well for AVGO

Broadcom benefits from a strong balance sheet and its free cash-flow-generating ability. As of Aug. 3, 2025, cash and cash equivalents were $10.72 billion, and Broadcom generated $7.17 billion in cash flow from operations. Free cash flow was $7.02 billion and accounted for 44% of revenues at the end of the third quarter of fiscal 2025.

The strong balance sheet is helping AVGO lower leverage, pay consistent dividends and return cash to shareholders through buybacks. Broadcom paid $2.8 billion in cash dividends in the fourth quarter of fiscal 2025.

AVGO’s Q3 Gross Margin to Suffer From Unfavorable XPU Mix

Broadcom’s fourth-quarter fiscal 2025 guidance indicates a 70 basis point sequential decline in gross margin due to a higher mix of lower-margin XPUs. A higher mix of lower-margin XPUs in the revenue mix is expected to keep gross margin under pressure throughout fiscal 2025. 

Broadcom expects non-AI semiconductor revenues to grow in the low double digits sequentially to roughly $4.6 billion in the fourth quarter of fiscal 2025. Broadband, server storage and wireless are expected to improve, while enterprise networking is expected to decline sequentially. Sluggish non-AI business remains a headwind, and Broadcom expects to see a U-shaped recovery by mid-2026 or late 2026.

The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $6.72 per share, unchanged over the past 30 days, indicating 38% growth from fiscal 2024’s reported figure. The consensus mark for fiscal 2025 revenues is currently pegged at $63.36 billion, suggesting 22.9% growth from fiscal 2024’s reported figure.

AVGO Shares Trading at a Premium

AVGO stock is trading at a premium, as suggested by the Value Score of F.

In terms of the forward 12-month price/sales, AVGO is trading at 20.08X, higher than the sector’s 6.9X, NVIDIA’s 18.24X, Marvell Technology’s 8.55X and Qualcomm’s 3.94X.

Price/Sales Ratio (F12M)

Conclusion

Broadcom’s expanding AI portfolio, along with a rich partner base, reflects solid top-line growth potential. These are good reasons to hold the stock for long-term investors.

However, declining gross margin, along with a challenging macroeconomic condition, doesn’t justify the premium valuation.

Broadcom currently carries a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to accumulate the stock. 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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