Semiconductor giant Broadcom (AVGO 2.10%) is one of the big winners in the recent generative artificial intelligence (AI) boom that started with the launch of OpenAI's ChatGPT in 2022. Shares have soared by roughly 350% in three years as investors bet on its ability to capitalize on the soaring demand for advanced computing hardware.
That said, some market participants feel that the AI boom might be getting ahead of itself as companies overspend on data centers without a meaningful guarantee of future returns. This uncertainty has sent Broadcom's stock down by around 15% from its all-time high of $412.
Let's dig deeper into the pros and cons of the stock to see if this dip is a buying opportunity or a signal for investors to stay far away.
Why are investors getting nervous?
The stock's recent slide came after Broadcom's fourth-quarter earnings report in mid-December. On the surface, the numbers were fantastic.
Revenue jumped 28% year over year to a record of $18 billion, driven by soaring demand for AI semiconductor revenue, which rose 74% in the period. This operating segment reflects sales of Broadcom's advanced computer hardware to AI data centers, and management expects the momentum to continue into 2026 as demand for these products continues to surge.
NASDAQ: AVGO
Key Data Points
Broadcom's bottom line is also looking great, with net income doubling to $8.5 billion. With numbers like these, it's hard to believe shares are on a two-week downtrend. However, the correction makes more sense when you look at some of the uncomfortable dynamics of the AI industry itself.
According to analysts at Goldman Sachs, hyperscalers are on track to spend an eye-popping $527 billion on AI-related capital expenditures (capex), with some of this going to hardware produced by companies like Broadcom. The problem is that the scale of the spending doesn't really match up with the profits generated by AI-related software services.
Deutsche Bank expects ChatGPT creator OpenAI to lose $140 billion by 2029. And despite being one of the top hardware spenders (with roughly $125 billion in capex for 2025), Amazon saw its cloud computing revenue rise by a relatively modest $5.6 billion compared to the prior-year period. The fear is that eventually shareholders will start to push back on all the AI spending. After all, this is money that could be going to buybacks or dividends.
Broadcom might be better positioned than Nvidia
Image source: Getty Images.
It is fair to assume that AI-related capex spending could soon drop to reasonable levels, which could reduce the growth potential of infrastructure providers like Broadcom. That said, the company is better positioned to weather a potential fallout than the industry leader, Nvidia. To understand why, we must first look at the reasons why AI development is so expensive and generally unprofitable right now.
Running and training large language models like ChatGPT requires thousands of expensive AI accelerators (such as Nvidia's Blackwell series), which consume significant amounts of energy. Broadcom's semiconductor business actually helps solve this problem by helping its clients develop application-specific integrated circuits (ASICs). These are custom chips designed to do a specific workload, making them cheaper and easier to run than Nvidia's large, general-purpose chips.
Obviously, ASICs won't be the magic bullet that makes AI companies stop burning through money. But they are the natural first step as companies seek to reduce their reliance on expensive third-party hardware. In October, cloud giant Google selected Broadcom to build its first in-house AI processor chips. This development follows a deal with OpenAI to co-develop AI accelerators and Ethernet solutions.
Is Broadcom stock a buy?
Broadcom's ability to benefit from the transition to custom chips makes it a strong bet in the generative AI opportunity. That said, the AI boom is getting long in the tooth, and investors may want to wait until there is more clarity about the sustainability of current industry hardware spending before taking a position in such a highly exposed stock.
