Broadcom's AI revenues surpass targets. Broadcom met and surpassed all expectations with AI revenue visibility of $100Bn. It has very strong cash flow margins. Buy the stock.
Broadcom delivered an excellent forecast and convinced analysts that there was a strong market for its ASICs and TPUs and that its penetration of the AI market was just beginning. Investors rewarded it with a sharp 6% post market gain, a huge reversal from the treatment it gave Broadcom in its previous quarter, and a welcome change from the treatment it gave its giant rival Nvidia with a severe drop just 2 weeks back.
The beats were modest, but the guidance and especially the earnings call were very solid. CEO, Hock Tan doesn’t mess around and never misses a beat, and after last quarter’s drubbing (purely market sentiment – there weren’t any fundamental differences), he ensured that analysts had plenty to like for the years ahead.
Q1 Non-GAAP EPS of $2.05 (+42% YoY) beat by $0.03
Revenue of $19.31Bn (+29.4% Y/Y) beat by $170M.
AI revenue: Q1 AI revenue of $8.4Bn rose 106% YoY, with a further acceleration to $10.7Bn in Q2
Phenomenal Margins and cash flow – Adjusted EBITDA margins were 68% of sales and should remain over 68% in Q2. Operating cash flow was 42.7% of sales and will remain north of 40% in Q2. Free cash flow was also abnormally high at over 40% – this is where all the Capex from the hyperscalers (especially Google) are going, Broadcom doesn’t need to spend it, instead it returns a lot of this cash to shareholders – $10.9Bn in Q1 with $3.1Bn of cash dividends and $7.8Bn buybacks.
Management stressed a strong future ahead, with a sixth customer and shared that OpenAI will use up 1Gigawatt of XPUs in 2027.
CEO, Hock Tan
Our visibility in 2027 has dramatically improved. Today, in fact, we have line of sight to achieve AI revenue from chips…in excess of $100 billion in 2027. We have also secured the supply chain required to achieve this.
Replying to analysts on the $100Bn number and investor concerns over hyperscalers’ return on investment. Tan explained,
What is very, very interesting and surprising to us is very much for inference in order to productize the LLMs…And that inference is driving a substantial amount of compute capacity, which is great for us because…our 5, 6 customers…are on the path to creating their own custom accelerators.
In all my previous posts and articles on Broadcom, I’ve always stressed that inference is going to be insanely huge; every simple question one asks on ChatGPT results in tokens generated for inference, which requires computing power, so one can imagine how much inference will be used in enterprise software databases not just for queries but 10x more for actual solutions. This is the tip of the iceberg, and ASICs and TPUs such as Broadcom’s do that part very efficiently – they’re specially designed for that purpose. 40% or more of Nvidia’s GPU revenue and usage is from inference, and Nvidia’s data center revenue is running at about $300Bn a year. Its absurd to think that Nvidia alone can supply all the AI computing needs to this market, and second largest competitor Broadcom is going to get a fairly large share of this market. Then it will continue to grow, think about it, we’ve barely scratched physical AI, which will be another huge area.
From Seeking Alpha:
“Strong AI outlook of over $100B in FY27 likely proves conservative with expectations to supply 10GW of compute including 1GW+ to AVGO’s 6th announced customer, OpenAI,” Jefferies analyst Blayne Curtis wrote in a note to clients. “The AI spend overhang will still linger, but AVGO made a strong case for their AI revenue to outgrow the market and see continued growth through C28.” Curtis has a Buy rating and a $500 price target on Broadcom.
Delving deeper, Curtis pointed to comments made by Broadcom management on the call that they already have 10 gigawatts of demand for fiscal 2027, including 1 gigawatt from the aforementioned OpenAI (OPENAI) and 3 gigawatts from Anthropic (ANTHRO). And with the company pointing to AI chip revenue surpassing $100B in 2027, Curtis said that may actually be conservative.
“Our math suggests revenue per GW was $13B/GW in CY25 rising to just under $18B in CY26 and we would expect this to ramp to $20-25B/GW in 2027, implying potential for AI revenue to actually reach over $200B,” Curtis posited.
“Overall, the debate for AVGO (and NVDA) will still be how sustainable cloud capex growth will be into C28 and this call didn’t necessarily answer that question, but this helps provide line of sight to $25-30 of EPS in CY27 (vs. our prior $20 upside case) and we struggle to see how these compute names will remain this cheap,” Curtis added.
RBC Capital Markets Srini Pajjuri was also impressed with the outlook for 2027, but said there are some issues that may be out of Broadcom’s control.
“AVGO has a solid execution track record, and we have little reason to question management’s visibility,” Pajjuri wrote in a note. “At the same time, the 10GW expectation for FY27 (~3GW in FY26) implies a steep ramp and could run into power/data center constraints. In addition, key customers Anthropic/META/OpenAI have equity-incentivized supply agreements with NVDA/AMD, which could take priority over AVGO’s ramps.” Pajjuri has a Sector Perform rating on Broadcom and upped his price target to $360 from $340 after the results.
Citi analyst Atif Malik reiterated his Buy rating after the results, as any concerns about margins or competition were put to bed.
“Management stated that Anthropic rack shipments will not pressure margins and confirmed OpenAI as its sixth AI customer,” Malik wrote in a note to clients. “The company also highlighted a sharp improvement in visibility, with line‑of‑sight to reaching $100B in AI revenue by F27. As a result, we raise our F26/F27 EPS (incl. SBC) estimates by 14%/17% to $10.15/$15.4.”
I own Broadcom and plan to hold it for the next 3-5 years and will add more on declines.
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