AVGO vs. CSCO: Which AI Infrastructure Stock is a Buy Right Now?

Broadcom (AVGO) and Cisco Systems (CSCO) are strongly positioned to capitalize on surging AI infrastructure demand, with Gartner projecting AI spending to exceed $2 trillion by 2026. Broadcom is experiencing significant growth from its XPUs for Generative AI, forecasting a 66% year-over-year increase in Q4 FY25 AI revenues to $6.2 billion, alongside strong networking product adoption. Cisco's aggressive AI strategy has doubled webscale AI infrastructure orders to $2 billion in FY25, supported by an expanding AI portfolio and a key partnership with NVIDIA for AI-ready data centers. Despite both companies being considered overvalued, their robust offerings and consistent earnings performance underscore their continued relevance in the rapidly expanding AI market.

Analysis

Broadcom (AVGO) and Cisco Systems (CSCO) are strongly positioned to capitalize on the burgeoning AI infrastructure market, projected to reach $2.02 trillion by 2026 from $987 billion in 2024. Both companies provide essential high-performance networking hardware and data center solutions, with AVGO appreciating 56.2% and CSCO 20.6% year-to-date. This indicates strong market confidence in their AI-driven growth prospects.

Broadcom's growth is significantly driven by its XPUs for Generative AI, which constituted 65% of Q3 FY25 AI revenues, and a $10 billion-plus order backlog for AI racks. The company forecasts a 66% year-over-year jump in Q4 FY25 AI revenues to $6.2 billion, further bolstered by its OpenAI deal for custom AI accelerators and advanced networking products like the Tomahawk 6 CPO Ethernet switch. These developments highlight AVGO's critical role in foundational AI compute.

Cisco's aggressive AI strategy has doubled webscale AI infrastructure orders to $2 billion in FY25, supported by new data center solutions and a critical partnership with NVIDIA for AI-ready data centers. Its security business is also thriving, benefiting from strong demand for solutions like Hypershield and XDR, alongside enhancements to its Webex suite. This diversified approach positions CSCO across various AI ecosystem layers.

While both companies consistently beat earnings estimates, with CSCO's 3.86% average surprise slightly exceeding AVGO's 2.82%, their valuations are stretched. Broadcom trades at a forward 12-month P/S of 20.18X, significantly higher than Cisco's 4.69X, leading to CSCO's Zacks Rank #2 (Buy) versus AVGO's #3 (Hold). This suggests a relative value proposition for Cisco despite the overall market's high expectations for AI plays.

Key Decisions for Investors

• Investors should consider strategic exposure to key AI infrastructure providers like Broadcom and Cisco, given the projected $2.02 trillion AI spending by 2026.
• Evaluate Broadcom for its high-growth, specialized AI compute and advanced networking solutions, acknowledging its premium valuation and strong order book.
• Assess Cisco for its comprehensive AI infrastructure and cybersecurity offerings, particularly its impactful NVIDIA partnership and more attractive valuation relative to Broadcom.
• Monitor both companies' earnings consistency and future guidance, especially considering their current 'overvalued' status, to inform long-term position adjustments.