Broadcom Slides on Solid Earnings, AI Outlook Still Strong

Broadcom's fiscal Q2 2024 results met expectations with revenue of $15 billion and adjusted EPS of $1.58, driving over 20% revenue growth. Guidance for fiscal Q3 projects revenue of $15.8 billion, implying 21% growth, and an adjusted EBITDA margin of at least 66%. CEO Hock Tan highlighted unwavering AI investment plans from hyperscale customers, projecting $5.1 billion in AI semiconductor revenue for fiscal Q3, but declined to provide updates on prospective customer contributions, leading to a moderate 4% share price decline after hours.

Analysis

Broadcom's fiscal Q2 2025 results were solid, aligning closely with expectations, as the company reported revenues of $15 billion, representing over 20% year-over-year growth, and adjusted earnings per share of $1.58, an increase of under 44% year-over-year. Guidance for fiscal Q3 2025 projects continued strength with revenues anticipated around $15.8 billion, implying 21% growth, although the adjusted EBITDA margin is guided to "at least" 66%, a slight moderation from the 67% achieved in Q2. CEO Hock Tan highlighted unwavering AI investment from hyper-scale customers, providing AI semiconductor revenue guidance of $5.1 billion for Q3, a 60% increase, and confirmed expectations for this growth rate to persist through fiscal 2025 and 2026. However, Tan's refusal to provide timelines for revenue contributions from prospective AI customers until fiscal 2026, or update serviceable addressable market (SAM) estimates, likely contributed to a tempered market reaction. Significant progress was noted in the VMware integration, with 87% of Broadcom's 10,000 largest VMware customers transitioned to subscription models, up from 70% a quarter ago, and two-thirds of the overall VMware customer base now converted. AI networking revenue also remained robust at 40% of total AI revenue, buoyed by increased Ethernet adoption in scale-up data center architectures. Despite these positive operational developments, Broadcom's shares declined approximately 4% in after-hours trading, reflecting investor expectations for more substantial beats given the stock's trading near all-time highs and its high P/E ratio of 205.58.

Key Decisions for Investors

• Investors should carefully evaluate Broadcom's high valuation (P/E 205.58) against its strong, ongoing AI-driven growth and successful VMware integration, recognizing the market's current demand for significant earnings outperformance.
• Monitor closely for any future announcements regarding the timing of revenue from new AI chip customers and updates to the company's AI serviceable addressable market, as these are pivotal potential catalysts for the stock.
• Consider the recent share price consolidation as an opportunity to assess long-term strategic allocation, factoring in sustained AI demand and positive AI networking trends, while acknowledging that current analyst price targets suggest limited immediate upside.