Broadcom AVGO) delivered another outstanding quarter on Wednesday evening this week, but even exceptional growth wasn’t enough to satisfy the market’s lofty expectations.
AVGO shares fell nearly 3% following the report and are now down almost 15% over the last month at around $358 a share, leaving the stock more than 25% below its all-time high reached in June.
The pullback may look tempting considering Broadcom’s rapidly expanding artificial intelligence business, but investors should weigh the chip giant’s tremendous growth prospects against a valuation that still prices in plenty of future success.
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Broadcom’s Growth Remains Exceptional
Broadcom’s fiscal Q3 revenue soared 85% year over year to a record $29.59 billion, while adjusted earnings nearly doubled to $3.32 per share. The results topped Wall Street’s sales and EPS expectations by 0.41% and 3.11%, respectively.
Furthermore, free cash flow was equally impressive, surging 95% to $13.7 billion.
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Most importantly, AI semiconductor revenue skyrocketed 221% to $16.7 billion, driven by custom AI accelerators and networking products. Broadcom expects AI semiconductor sales to accelerate further to $21.7 billion in Q4, representing 236% growth from the comparable period.
This comes as Broadcom has substantial exposure to hyperscale AI spending through customers such as Alphabet GOOGL) and Meta Platforms META). Its custom accelerators give these companies another avenue for scaling AI infrastructure alongside chips from AI leader Nvidia NVDA).
Even more impressive, management now sees roughly $115 billion of AI semiconductor revenue in its current fiscal 2027, up from its previous outlook of more than $100 billion, with the opportunity potentially doubling again to around $230 billion in FY28.
Why Did AVGO Stock Fall?
The selloff was largely tied to Broadcom’s near-term outlook rather than its Q3 performance.
Management guided for Q4 revenue of approximately $34.8 billion, representing phenomenal growth of 93% YoY. However, the outlook fell slightly short of some Wall Street forecasts near $35 billion-$35.4 billion.
That highlights Broadcom’s biggest near-term challenge: expectations have become extraordinarily high. When investors are pricing in triple-digit AI growth, even a slight guidance shortfall can pressure the stock.
AVGO’s Valuation Is Improving, But Still Not Cheap
Broadcom’s post-earnings dip has made its valuation more appealing, with AVGO now trading at 34X forward earnings. This is slightly beneath its Zacks Electronics-Semiconductors Industry average but still noticeably above the benchmark S&P 500’s 21X.
The premium to the broader market isn’t necessarily unjustified considering Broadcom’s extraordinary AI growth, robust free cash flow, and rapidly expanding earnings outlook. That said, it leaves the stock vulnerable whenever results or guidance merely meet rather than dramatically exceed Wall Street expectations.
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Bottom Line
Broadcom’s post-earnings selloff appears to be more about sky-high expectations than deteriorating fundamentals. AI semiconductor revenue is more than tripling, management has raised its long-term AI outlook, and relationships with hyperscalers such as Alphabet and Meta provide excellent exposure to the ongoing AI infrastructure buildout.
Therefore, the pullback is certainly making AVGO more attractive for long-term investors, but it may still be a little early to aggressively buy the dip while Wall Street digests the company’s Q4 outlook.
For now, Broadcom stock lands a Zacks Rank #3 (Hold), suggesting investors may want to watch whether post-earnings estimate revisions can improve the case for AVGO after its recent decline.
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This article originally published on Zacks Investment Research (zacks.com).
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