Semiconductor stocks have been on fire in 2025, which is evident from the terrific 40% gain in the PHLX Semiconductor Sector index this year. Those impressive returns aren't surprising as the sector continues to benefit from aggressive spending on artificial intelligence (AI) applications.
Whether they're destined to be installed in data centers or smartphones, personal computers or factories, there's massive demand for the types of high-end chips capable of handling processing-heavy workloads such as training large language models (LLMs) and running AI applications such as chatbots, text and image generation tools, video creation tools, and coding applications, among others. This explains why the semiconductor market's revenue is expected to increase by 10% in 2026 to $800 billion.
Sales of AI chips in particular are projected to grow at a much faster pace. Not surprisingly, analysts are expecting more upside from Broadcom (AVGO 1.71%) -- one of the leading names in the AI chip niche -- in the coming year. Indeed, even after its 105% surge in the past year, most Wall Street analysts covering it recommend buying this semiconductor stock.
Image source: Getty Images
Broadcom's AI business could accelerate substantially in 2026
Broadcom designs custom processors known as application-specific integrated circuits (ASICs) that are deployed in data centers, broadband networks, storage servers, and wireless devices. As the name would suggest, these chips are designed to perform specific tasks. That specialization allows them to be more efficient at their tasks than general-purpose chips.
This nature of Broadcom's custom processors has made them ideal for deployment in AI servers, where both computing power and power efficiency are highly desired traits. As a result, the company has been witnessing remarkable growth in its AI chip sales. In its fiscal 2024 (which ended in November 2024), AI revenue grew by a whopping 220% to $12.2 billion.
Broadcom has already generated $13.7 billion in AI revenue in the first three quarters of fiscal 2025. Its forecast for the current quarter suggests that it will close fiscal 2025 with just under $20 billion in AI revenue. However, analysts are projecting even stronger growth on that front over the next couple of years. Morningstar is expecting Broadcom to double its AI revenue in fiscal 2026, followed by almost identical growth in fiscal 2027.
The chipmaker has the potential to meet those expectations or even exceed them, because its AI revenue pipeline is picking up nicely. Broadcom has a three-year deal to ship 10 gigawatts (GW) worth of custom AI chips to OpenAI, and this business could add a whopping $100 billion to the chip designer's top line.
So, Broadcom's AI revenue could grow at a much stronger pace once it starts deploying those chips for OpenAI in the second half of 2026. What's worth noting is that this isn't the only sizable contract that Broadcom has announced of late. It received a $10 billion order from a different client in September that it has yet to name publicly. These deals should boost Broadcom's already impressive order backlog, which was worth a whopping $110 billion at the end of its last reported quarter.
NASDAQ: AVGO
Key Data Points
Moreover, investors should note that Broadcom pointed out that it was engaged in the development of custom chips for four potential customers earlier this year, in addition to the three customers that it already had. It seems like the company has converted two of those potential customers into actual ones. So, there is a chance of the company reporting stronger growth next year if it can bring the other two on board as well.
The stock remains an overwhelming buy
Broadcom stock has more than doubled in the past year. Even so, 90% of the 50 analysts covering the stock rate it as a buy. Its 12-month median price target of $400 points toward a jump of 13% from current levels.
This is impressive for a stock that's trading at 27 times sales, as Wall Street's price target suggests that Broadcom is capable of justifying its valuation. In fact, consensus estimates are projecting a 35% increase in Broadcom's revenue in fiscal 2026 to $85 billion, up from the 23% growth it is expected to clock in fiscal 2025.
But the company could do better than that, as it has a robust revenue pipeline that has the potential to expand further. So, Broadcom could surpass Wall Street's price target in 2026 and deliver bigger gains to investors, which is why it isn't too late to buy this AI stock right now.
