Broadcom (AVGO 4.51%) shares recently sold off after the company reported a sharp acceleration in revenue growth. The stock has started to recover, but is still down 17% from its previous high at the time of writing.
Investors might have been looking for stronger revenue guidance for the rest of the year, but it’s still puzzling that the stock fell this sharply. Management guided for another massive jump in AI chip revenue next quarter and provided a positive outlook for its AI semiconductor business over the next few years. Here’s why this looks like a great setup for a buying opportunity.
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AI chip revenue is expected to grow 200% next quarter
The AI data center build-out cycle remains robust. The Motley Fool’s research found that four of the “Magnificent Seven” (Alphabet, Microsoft, Amazon, and Meta Platforms) were expected to increase capital spending by at least 45% in 2026. Broadcom is riding the wave, with revenue up 48% year over year last quarter, reaching $22 billion. Revenue for its AI chips, or XPUs, grew 143% to $10.8 billion.
CEO Hock Tan said, “Demand for XPUs and networking is simply insatiable.” Fiscal third-quarter guidance calls for AI chip revenue to accelerate again next quarter, growing over 200% year over year to reach $16 billion.
In light of this momentum, the stock’s dip seems to be nothing more than a healthy pullback before another leg higher. The forward price-to-earnings multiple is 30, which is not cheap but reasonable for a company that just posted earnings growth of 54%, with analysts projecting 45% annual earnings growth over the next few years.
Management expects growth through at least fiscal 2028
Some leading AI tech stocks are trading at low earnings multiples relative to their earnings growth. This is the market’s way of discounting the possibility of a slowdown in data center spending, which is the main risk for Broadcom. But the valuation discount is an opportunity for long-term investors.
Broadcom has deals with every leading AI company, including Google, Anthropic, and OpenAI. It just signed a long-term agreement to supply multiple generations of TPUs and AI networking to Google. It has similar deals in place with the other companies.
Obviously, anything that slows down data center spending, such as regulations on new construction, would likely send Broadcom stock lower. But the opportunity is that people are not using AI less. They will only use it more as these models improve. ChatGPT users have doubled over the last year and are now approaching 1 billion weekly users. That will just put more strain on existing compute capacity, which is already short, requiring continued investment to keep up with demand.
Broadcom stock has already risen almost 400% over the past three years, but with this much opportunity ahead, the stock’s bull run doesn’t appear to be over yet. Tan reiterated the expectation that AI chip revenue alone will exceed $100 billion by fiscal 2027, with continued growth into fiscal 2028. The recent demand trends, new agreements with Google and others, and long-term outlook make the recent dip a buying opportunity.