While Broadcom (AVGO 4.11%) reported strong fiscal Q1 results this week, there were two things that really stuck out from the company’s earnings conference transcript that should get investors excited. Both are huge positives and why the stock should be considered a top buy today. Let’s take a closer look at these two revelations.
The custom AI chip opportunity
It’s no secret that Broadcom has a big artificial intelligence (AI) infrastructure opportunity in front of it, but the company helped crystallize that potential on its earnings call when it said it expected to generate over $100 billion in custom AI chip revenue by 2027. Notably, this was just for AI ASIC (application-specific integrated circuit) revenue and does not include AI data center networking revenue. The company said it has a clear line of sight with AI chip volumes expected to ramp from customers Alphabet, Anthropic, Meta Platforms, and OpenAI.
Image source: The Motley Fool.
That $100 billion is just a massive number. Broadcom reported total revenue of just under $64 billion in fiscal 2025, with about $20 billion coming from AI revenue. Citigroup, meanwhile, has estimated that about $14 billion of Broadcom’s AI revenue comes from ASICs. That means its AI chip revenue is set to explode by around sevenfold over the next two years.
Its AI networking revenue, meanwhile, is also growing quickly, climbing 60% last quarter, with projections that it will grow more quickly in fiscal Q2. It expects AI networking revenue to be between one-third to 40% of its AI revenue in any given quarter, so that would see the company generate an additional $30 billion to $40 billion in AI revenue from networking in fiscal 2027. That’s just massive growth all around from Broadcom.
Today’s Change
(-4.11%) $-13.81
Current Price
$322.16
Key Data Points
Market Cap
$1.5T
Day’s Range
$321.43 – $338.28
52wk Range
$138.10 – $414.61
Volume
1.5M
Avg Vol
30M
Gross Margin
64.96%
Dividend Yield
0.75%
Strong gross margin outlook
The biggest knock on Broadcom’s outlook has been that its ASIC business comes at lower gross margins. Meanwhile, rack sales of Alphabet tensor processing units (TPUs) were expected to be at even lower margins. However, on its call, Broadcom management came out and said that was not the case.
The company was asked specifically on the call by an analyst if rack sales would reduce its gross margin by 500 basis points since they should be in the 45% to 50% range, to which CEO Hock Tan asked if the analyst was having an AI hallucination. Tan said that Broadcom’s semiconductor gross margins will not be impacted by increased sales and that sales will be consistent with the rest of its semiconductor business. That’s huge news, as sell-side analysts have largely been looking for Broadcom’s gross margins to come under increasing pressure, which doesn’t appear to be the case.
Time to buy Broadcom
Broadcom is one of the most explosive AI stories out there right now. With its growth outlook clarified and the biggest knock on the company rebuffed with regard to its gross margins, the stock is a strong buy.
Citigroup is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Alphabet, Broadcom, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
