Is Broadcom (AVGO) Stock a Buy Before Its Q3 Earnings?

Broadcom AVGO) is scheduled to report results for its fiscal third quarter after-market hours on Wednesday, September 2, with Wall Street looking for another quarter of exceptional growth.

This comes as custom AI accelerators, networking chips, and its VMware integration continue to drive the company's expansion.

Broadcom has already set a high bar by forecasting another major acceleration in AI semiconductor revenue, although AVGO shares are up a modest 7% year to date but have posted impressive gains of more than 125% in the last two years.  

Broadcom's Q3 Expectations

The Zacks Consensus Estimate calls for Broadcom to post Q3 earnings of $3.22 per share, representing a remarkable 90% increase from EPS of $1.69 in the year-ago period. Quarterly revenue is projected at $29.47 billion, up nearly 85% from $15.95 billion in the prior-year quarter.

Wall Street's sales forecast is still in line with management's guidance for roughly $29.4 billion in Q3 revenue, with Broadcom expecting adjusted EBITDA to equal approximately 68% of revenue, underscoring the company's tremendous profitability despite its rapid expansion.

The expectations follow a record second quarter in which revenue climbed 48% to $22.18 billion, while adjusted EPS reached $2.44. Broadcom also generated an impressive $10.26 billion in free cash flow, or 46% of quarterly revenue.

Notably, Broadcom has exceeded earnings expectations for 21 consecutive quarters with an average EPS surprise of 2.19% in its last four quarterly reports.

AI Revenue Could Be the Main Catalyst

More important than the headline numbers will be Broadcom's AI semiconductor business.

After Q2 AI semiconductor revenue soared 143% to $10.8 billion, management expects the figure to reach approximately $16 billion in Q3, representing more than 200% YoY growth. That would also mark a nearly 50% sequential increase in just one quarter.

Much of this growth is being fueled by Broadcom's custom AI accelerators, or X Application-Specific Purpose Units (XPUs), and its Ethernet networking portfolio, which allow hyperscalers to build increasingly large AI computing clusters.

Broadcom's expanding list of partners is particularly noteworthy. The company has a multi-year partnership with Meta Platforms META) to support Meta’s MTIA custom AI chips, including a next-generation 2-nanometer accelerator. Broadcom is also working closely with OpenAI on custom AI accelerators, including a planned 10-gigawatt deployment and the recently unveiled Jalapeño Intelligence Processor.

Furthermore, Broadcom has AI engagements with Alphabet's Google GOOGL) and Anthropic, giving it exposure to several of the world's largest AI infrastructure spenders.

VMware Adds Another Growth Engine

Broadcom's growth story extends beyond AI chips. VMware, which Broadcom acquired in 2023, provides virtualization and private-cloud software that allows enterprises to efficiently run and manage applications and computing workloads across their own data-center infrastructure.

VMware Cloud Foundation (VCF) is increasingly being positioned as a platform for running traditional applications alongside newer AI workloads and is providing a nice boost to Broadcom’s software revenue.

To that point, Broadcom's Infrastructure Software revenue rose 9% YoY to $7.2 billion in Q2, while annual recurring revenue (ARR) increased 17%. Management expects a sharp acceleration in Q3, forecasting Infrastructure Software revenue to increase 31% to $8.9 billion.

Broadcom cited particularly strong adoption of VMware Cloud Foundation 9.1, which enables enterprises to run AI inference and Kubernetes, which is a central platform for orchestrating containerized applications and traditional virtualized workloads across Nvidia NVDA), AMD AMD) and Intel INTC) computing platforms.

That makes VMware an important complement to Broadcom's booming semiconductor business, adding a recurring, high-margin software revenue stream while also giving the company another way to benefit from growing enterprise AI infrastructure spending.

Can Broadcom Keep Gaining Ground on Nvidia?

Broadcom occupies an increasingly important position in the AI chip market, but competition remains fierce.

Nvidia remains the dominant supplier of general-purpose AI accelerators and is also pushing aggressively into the networking market. Meanwhile, Marvell Technology MRVL) competes directly with Broadcom in custom AI silicon and high-speed data-center connectivity.

Broadcom's advantage is that hyperscalers increasingly want customized chips optimized for their own AI workloads, rather than relying exclusively on more expensive general-purpose GPUs. Broadcom doesn't necessarily have to displace Nvidia for its AI business to thrive, as it can capture a growing portion of the enormous AI infrastructure market alongside Nvidia.

Broadcom’s Growth Trajectory Remains Encouraging

Broadcom’s outlook remains encouraging, with Zacks projections calling for the chip giant’s annual earnings to increase 72% this year to $11.74 per share versus EPS of $6.82 in fiscal 2025. Plus, FY27 EPS is projected to spike another 63% to $19.10.

This comes as Broadcom’s top line is expected to expand over 65% in FY26 and FY27, with next year's sales projections heading north of $175 billion.

Bottom Line

Broadcom enters Wednesday's report with extremely high expectations, but its fundamentals continue to justify much of that optimism. AI semiconductor revenue is projected to exceed $16 billion in Q3 alone, VMware is strengthening the company's recurring software business, and partnerships with Meta, OpenAI, and other hyperscalers provide significant visibility into future AI infrastructure spending.

That said, there is certainly execution risk when revenue and earnings are expected to rise at such extraordinary rates, making Broadcom's Q4 outlook especially important. Nevertheless, its expanding custom AI accelerator business and leadership in next-generation networking make Broadcom stock one of the most compelling ways to gain exposure to AI infrastructure growth.

With AVGO trading at a reasonable 31X forward earnings multiple, Broadcom stock currently sports a Zacks Rank #2 (Buy), as EPS revisions for FY26 and FY27 are still sharply higher in the last 90 days.

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

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