Broadcom (AVGO +1.36%) has successfully positioned itself as a crucial player in the global artificial intelligence (AI) infrastructure build-out. The company's custom accelerators (XPUs), high-speed Ethernet-based networking products, and VMware Cloud Foundation private cloud software platform are now being used extensively by hyperscalers and AI labs to run large AI workloads.
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Broadcom will report its results for the fourth quarter and fiscal year 2025 (ending Nov. 2, 2025) on Dec. 11, which may significantly impact 2026 expectations and the company's future share price trajectory. However, the stock is currently trading at 40.3 times forward earnings, which implies that much of the potential upside is already priced in. Hence, investors need to consider whether to buy, sell, or lock in profits ahead of the quarterly update.
Multiyear XPU adoption cycle
Investors need to keep a keen eye on the fiscal 2026 and fiscal 2027 forecasts that may be provided in the upcoming earnings call. Management has already stated that AI revenue will expand even faster than fiscal 2025's estimated 50% to 60% year-over-year growth rate, driven mainly by exceptional demand for its custom accelerators from its three major hyperscaler clients and a rapid ramp-up at a fourth client.
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Key Data Points
Broadcom believes each of its three hyperscaler customers will deploy 1 million of the company's XPUs in AI clusters by 2027. These clients are increasingly opting for XPUs in their multiyear expansion cycle.
The company also secured a $10 billion order for XPU-based AI racks from the fourth qualified customer in the third quarter of fiscal 2025. Volume shipments from this order are expected to commence from the third quarter of fiscal 2026. The company is thus focused on seven key large language model players, of which four are already clients, while the remaining three are high-potential prospects.
Alphabet catalyst
Broadcom's multiyear partnership with Alphabet is also proving to be a significant growth catalyst. Since 2016, Broadcom has been helping Alphabet develop and manufacture its in-house Tensor Processing Units (specialized AI chips), and the accelerating use of these TPUs in training and inference for Alphabet's frontier models is increasing Broadcom's long-term visibility in the AI semiconductor market.
Broadcom may also see increased use of its advanced packaging, networking interconnects, and SerDes interfaces (for chips to communicate with the outside world) in newer generations of TPUs.
Ethernet networking
Broadcom's open-source Ethernet-based networking switches and interconnects are also being adopted by hyperscalers, especially in AI clusters spanning over 100,000 compute nodes. These high-bandwidth, low-latency, and power-efficient networking hardware solutions are enabling scale-up networking (connecting XPUs and GPUs in a rack), scale-out networking (connecting multiple racks in a data center), and scale-across networking (connecting physically separate data centers).
Broadcom's Tomahawk 5 and 6 switches and Jericho 3 and 4 fabric routers offer an open-source alternative to Nvidia's proprietary solutions, such as NVLink or InfiniBand. Being open-source, these products also avoid vendor lock-in for clients.
Infrastructure software business
The high-margin infrastructure software business now accounts for almost 43% of Broadcom's total revenue. Nearly 90% of VMware's top 10,000 customers have purchased licenses to deploy traditional and AI workloads on-premise or on partner clouds through the VMware Cloud Foundation (VCF) private cloud platform. However, still many of the 10,000 customers are rolling out deployments across data centers. While this transition may take around two years, once completed, it can be a solid source of durable, high-margin revenue streams for Broadcom.
Non-AI business
While Broadcom's non-AI chip business has been mostly flat in the third quarter, Broadcom expects modest improvement in the fourth quarter. Yet the recovery is expected to be more U-shaped than V-shaped and could drag on the company's share prices.
Future outlook
Broadcom is guiding for fourth-quarter revenue of nearly $17.4 billion, up 24% year over year. Semiconductor revenue is expected to rise 30% year over year to $10.7 billion, while AI semiconductor revenue is projected to surge 66% year over year to $6.2 billion. The company also expects infrastructure software revenue to grow 15% year over year to $6.7 billion. Finally, fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are estimated to be 67%.
While these estimates are already strong, a better-than-expected performance can further propel Broadcom's share price after Dec. 11.
Is it a buy, sell, or hold?
While Broadcom is riding several long-term growth catalysts, its elevated valuation leaves very little room for error. Hence, long-term investors can take a small stake and use a dollar-cost averaging strategy to build a position in this stock.
In case you already hold a position in the stock, it may be better to have it through Dec. 11. With the company's $110 billion backlog at the end of the third quarter, the company can continue to see significant share price appreciation even at elevated levels.
