Over the past several weeks, investors have been bombarded with a wave of updates as companies reported earnings results for the second calendar quarter. For technology investors, artificial intelligence (AI) remains the dominant theme fueling the sector higher.
As I write this (mid-day on Aug. 27), all of the "Magnificent Seven" have posted earnings -- with the lone exception being Nvidia (NVDA -3.38%), which reports later today. Still, the breadcrumbs left by big tech point to an undeniable trend: Spending on AI infrastructure is accelerating.
While this is undeniably bullish for graphics processing unit (GPU) leaders like Nvidia and Advanced Micro Devices, it also creates a powerful tailwind for systems integration specialist Broadcom (AVGO -3.70%).
With Broadcom slated to report earnings on Sept. 4, I predict the stock is well-positioned to rally.
Let's explore why I'm optimistic about Broadcom's upcoming earnings report, and assess whether the stock is a compelling buy at current levels.
Follow big tech's breadcrumbs
Global hyperscalers such as Amazon, Alphabet, Microsoft, and Meta Platforms have been spending record sums on capital expenditures (capex) over the last few years. While this clearly bodes well for Nvidia and AMD, Broadcom has also been a quiet beneficiary of rising AI infrastructure investment.
Data by YCharts.
One of Broadcom's key AI growth drivers comes from its application-specific integrated circuits (ASICs) business. These custom silicon solutions allow customers to design chips that are optimized for their unique workloads.
By integrating purpose-built performance with compute power efficiency, Broadcom's ASICs help hyperscalers lower their total cost of infrastructure relative to relying solely on off-the-shelf accelerators from the likes of Nvidia. This becomes highly desirable as training and inferencing workloads scale and become increasingly complex as more sophisticated AI use cases unfold.
Broadcom's networking division is also positioned to benefit materially from the ongoing AI infrastructure cycle. As big tech continues to pour hundreds of billions of dollars annually into GPU deployment, Broadcom's supporting infrastructure becomes an indispensable unsung hero.
The company's portfolio of high-performance switches, interconnects, and optical components delivers low-latency, high-bandwidth connectivity to keep next-generation accelerators running at full speed. In essence, the company's networking gear represents a foundational layer of AI data center construction -- ensuring scalability and efficiency as workloads expand.
Image source: Getty Images.
Management likes the stock -- shouldn't you?
With a forward price-to-earnings (P/E) multiple of 45, Broadcom certainly isn't trading at a discount. In fact, its multiple sits near peak levels seen during the AI revolution.
Data by YCharts.
Even so, the company's board of directors authorized a $10 billion stock buyback program back in April. Share buybacks at elevated valuations can point to a strong signal: Management remains confident in Broadcom's long-term growth trajectory, underscored by ongoing hyperscaler investment. On a more subtle note, sometimes companies repurchase their own shares when management thinks the stock is undervalued.
These dynamics could suggest that Broadcom is positioned for sustained, robust earnings growth, which could fuel further valuation expansion -- even in the face of a premium multiple.
Is Broadcom stock a buy right now?
For the last few years, the AI trade has largely surrounded Nvidia and the cloud hyperscalers. Yet as infrastructure spending accelerates, the scope of the AI opportunity is broadening to other mission-critical enablers such as Broadcom. Custom chips, high-performance networking equipment, and integrated systems are now just as essential as securing GPUs -- and Broadcom sits squarely at this intersection.
In my eyes, Broadcom is approaching its own "Nvidia moment" -- a potential inflection where the narrative begins to recognize Broadcom as a supporting pillar of AI infrastructure and not simply an ancillary beneficiary of these tailwinds.
Against this backdrop, I predict that Broadcom's September earnings report will reinforce its strategic importance in the AI landscape -- fueling investor enthusiasm and a further rerating of the stock. For these reasons, I see Broadcom as a compelling opportunity to buy and hold over a long-term time horizon.
