Broadcom (AVGO 5.59%) ended its fiscal year riding strong momentum from increasing artificial intelligence (AI) infrastructure demand. However, the stock slipped after CEO Hock Tan clumsily answered a question about customer-owned tooling, which is the risk that customers would take the bulk of the design work in-house and forgo using Broadcom.
Let's take a closer look at Broadcom's recent results to see if this dip is a buying opportunity.
Strong momentum continues
Both Broadcom's networking and custom AI chip businesses performed well to close out its fiscal year. It saw its fiscal Q4 AI revenue soar 74% to $6.5 billion and projected that it would double in fiscal Q1 to $8.2 billion. Meanwhile, it noted a $73 billion AI backlog consisting of custom AI chips and networking components that it will fulfill over the next 18 months.
The company also announced that it had acquired a fifth custom AI chip customer that has placed an order for $1 billion worth of chips for delivery in late 2026. It also revealed that Anthropic was its mystery $10 billion fourth customer, although it will be purchasing Alphabet's tensor processing units (TPUs). Anthropic has also placed a second $11 billion order for late 2026.
Image source: Getty Images.
However, when asked about the risk of customers taking design work in-house, Tan's answer may have spooked investors. He touted the benefits of custom ASICs (application-specific integrated circuits) over off-the-shelf graphic processing units (GPUs), but then noted that GPUs' rapid evolution was a reason customers needed to stick with Broadcom to avoid being left behind. That's a bit of a tightrope the company is trying to walk.
Turning to its results, Broadcom's overall revenue climbed 28% year over year to $18.02 billion in the quarter, while adjusted earnings per share (EPS) jumped 37% to $1.95. The results topped analyst expectations for adjusted EPS of $1.86 on revenue of $17.49 billion, as compiled by LSEG. Adjusted EBITDA, meanwhile, grew by 34% year over year to $12.2 billion.
Total semiconductor solutions revenue increased by 35% year over year to $11.1 billion. Its non-AI chip revenue remains sluggish, up just 2% in the quarter. Infrastructure software revenue, meanwhile, jumped by 19% to $6.9 billion.
Broadcom continues to generate strong cash flow, with cash flow from operations of $7.7 billion and free cash flow of $7.5 billion. It ended the quarter with nearly $16.2 billion in cash and equivalents and $65.1 billion in debt, which comes from its $69 billion acquisition of VMware in 2023.
Looking ahead, Broadcom forecasts fiscal Q1 revenue to grow by 28% to $19.1 billion, with semiconductor revenue soaring 50% to $12.3 billion and infrastructure software revenue edging up 2% to $6.8 billion. It expects adjusted EBITDA to be approximately 67% of revenue, or about $12.8 billion.
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Key Data Points
Is it time to buy the dip?
Broadcom has an absolutely huge opportunity in front of it, as more and more hyperscaler customers turn to it to help them design their own custom AI ASICs. Much of its ASIC revenue is currently coming from Alphabet, but it is broadening, and it has a massive deal with OpenAI that is expected to begin in 2027.
Now there is a risk with Alphabet, as the company's technology is furthest along, and there have been reports that it has been working with MediaTek on a TPU variant. However, there really isn't much chance of a switch until at least 2028, and even then, that's an uncertainty.
From a valuation perspective, Broadcom stock now trades at a forward price-to-earnings (P/E) ratio of about 39 times. While that is not cheap, the company is poised to see explosive growth over the next few years. With the ASICs deals it has in place, it could easily see its revenue double in the next few years.
While Broadcom is not without risks, I think this dip is a solid opportunity to add some shares heading into the new year.
