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Broadcom AVGO shares dropped 6.2% in the past couple of trading sessions following the company’s second-quarter fiscal 2025 results on Thursday, last week. AVGO reported earnings of $1.58 per share that beat the Zacks Consensus Estimate by 0.64% while revenues of $15 billion surpassed the consensus mark by 0.37%. AVGO benefited from strong AI semiconductor revenues (up 46% year over year to $4.4 billion) and momentum in the VMware business.
However, third-quarter fiscal 2025 guidance reflects sluggishness in server storage, wireless and industrial businesses. Third-quarter fiscal revenue guidance of $15.8 billion suggests 21% year-over-year growth but indicates modest sequential growth. Gross margin is expected to decline roughly 130 basis points sequentially, reflecting a higher mix of custom AI accelerators (XPUs) with AI revenues. A higher mix of lower-margin XPUs in the revenue mix is expected to keep gross margin under pressure throughout fiscal 2025.
XPUs, which are a type of application-specific integrated chips (ASICs), are necessary to train Generative AI models, and they require complex integration of compute, memory, and I/O capabilities to achieve the necessary performance at lower power consumption and cost. Strong demand for Broadcom’s ASICs is driving top-line growth. In the second quarter of fiscal 2025, XPU revenues grew double digits year over year. Alphabet and Meta Platforms META are notable users of Broadcom’s ASICs.
Year to date (YTD), Broadcom shares have appreciated 5.2%, outperforming the Zacks Electronics Semiconductors industry’s return of 3% and the Zacks Computer and Technology sector’s 1.8%. AVGO is benefiting from an expanding portfolio, rich partner base, solid VMware business, strong balance sheet and impressive free cash flow. Broadcom has outperformed its semiconductor peers, including Advanced Micro Devices AMD and Marvell Technology MRVL. While AMD shares have returned 0.6% YTD, Marvell Technology shares have dropped 37.4%.
So, is the Broadcom stock still a buy? Let’s find out.
Broadcom’s innovative portfolio has been a key catalyst. Strong demand for AI networking revenues, which jumped 170% year over year, represented 40% of AI revenues. Broadcom’s networking portfolio, which comprises Tomahawk switches, Jericho routers and NICs, is helping it gain market share among hyperscalers. The launch of the next-gen Tomahawk 6 switch is a game changer as it enables clusters of more than 100,000 AI accelerators to be deployed in only two tiers instead of three. Reduction in lower tier offers lower latency, higher bandwidth and reduced power consumption that enables much better performance in training next-generation frontier models.
Broadcom’s focus on delivering AI-powered, proactive security to stay ahead of evolving cyber threats has been noteworthy. In March, AVGO introduced updates to VMware vDefend, improving security planning, lifecycle management, and scalability for VMware Cloud Foundation with new tools like the Security Segmentation Assessment and Report, optimized micro-segmentation, and advanced Network Detection and Response, all aimed at improving threat prevention and operational efficiency. In April, Broadcom introduced Incident Prediction, which extends the security feature of Adaptive Protection, a unique capability of Symantec Endpoint Security Complete (SES-C).
AVGO sees massive opportunities in the AI space as its three hyperscaler customers have started to develop their own XPUs. It believes that by 2027, each of AVGO’s three hyperscalers plans to deploy 1 million XPU clusters across a single fabric.
Broadcom’s rich partner base, including NVIDIA, Arista Networks, Alphabet, Dell Technologies, Meta Platform, Juniper and Supermicro, has been a key catalyst. These factors are expected to drive strong AI revenues. AVGO expects third-quarter fiscal 2025 AI revenues to jump 60% year over year to $5.1 billion.
Broadcom benefits from a strong balance sheet and its free cash-flow-generating ability. As of May 4, 2025, cash and cash equivalents were $9.47 billion, and Broadcom generated $6.55 billion in cash flow from operations. Free cash flow was $6.41 billion and accounted for 43% of revenue at the end of the second quarter of fiscal 2025.
The strong balance sheet is helping AVGO lower leverage, pay consistent dividends and return cash to shareholders through buybacks. The company recently paid off $1.6 billion of debt, resulting in gross principal debt of $67.8 billion. Broadcom paid $2.8 billion of cash dividends and purchased $4.2 billion, or approximately 25 million shares of common stock, in the second quarter of fiscal 2025.
The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $6.63 per share, up by a penny over the past 30 days, indicating 36.14% year-over-year growth.
Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote
The consensus estimate for fiscal third-quarter earnings is pegged at $1.68 per share, up a penny over the past 30 days, indicating 35.48% year-over-year growth.
AVGO stock is trading at a premium, as suggested by the Value Score of D.
In terms of the forward 12-month Price/Sales, AVGO is trading at 16.69X, higher than the sector’s 6.38X, AMD’s 5.79X and Marvell Technology’s 6.83X.
Broadcom’s expanding AI portfolio, along with a rich partner base, reflects solid top-line growth potential. These factors justify the premium valuation.
Broadcom currently carries a Zacks Rank #2 (Buy), which implies investors should start accumulating the stock right now. 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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